Bank of America tapped for South32’s Illawarra Met Coal sale

Illawarra Metallurgical Coal is being offloaded by South32 to Indonesian interests. Picture: Supplied

Bank of America and law firm Herbert Smith Freehills have been hired for South32’s sale of its Illawarra Metallurgical Coal business to Stanmore Coal backer Golden Energy Resources and Matt Latimore’s M Resources for up to $US1.65bn ($2.5bn).

The deal comes after speculation emerged last year that South32 was planning to sell the NSW coal asset following the sale of BHP’s Queensland coal mines.

While delivering South32’s full year result in August, chief executive Graham Kerr said that South32 was not currently running a sale process for the asset but that “everything’s for sale at the right price”.

BlueScope said it had a longstanding supply agreement with Illawarra Metallurgical Coal out to 2032 for supply of a blend of metallurgical coal from its Appin and Dendrobium mines in the Illawarra.

BlueScope has ongoing rights under the long-term supply contract, including pre-emption acquisition rights in favour of BlueScope, and the company would consider its position, it told the market in a statement on Thursday.

The terms of the deal involve South32 selling IMC for $US1.05bn up front and then $US250m deferred cash paid in 2030 and contingent price linked cash consideration of up to $US350m.

The price equates to 7.2 times annual free cash flow for IMC.

South32 said that the sale would strengthen its balance sheet and enable it to invest in other areas such as copper and zinc.

Golden Energy is owned by Indonesia’s Sinar Mas and has made efforts to buy out the Australian listed Stanmore Coal, of which it is a major shareholder.

M Resources is founded and run by former Wesfarmers coal mining executive Matt Latimore.

IMC operations are in the Illawarra and Macarthur regions of the southern coalfields of New South Wales, about 75km south of Sydney.

The asset produces premium-quality hard coking coal at its Appin and Dendrobium underground mines for steelmaking within Australia and around the world.

The coal is processed at its West Cliff and Dendrobium coal preparation plants before being transported by rail to the Port Kembla coal terminal, managed by South32 on behalf of a consortium.

Illawarra Coal produces 5497 kilotonnes of metallurgical coal annually.

South32 was thought to have high hopes for its Dendrobium mine, but the project had to be scaled back due to its proximity to Sydney’s water catchment.

There had been suggestions in the market last year that because Dendrobium is not to be the scale South32 had hoped for, it did not make strategic sense for the Australian listed miner to own an asset of such size.

Both Dendrobium and Appin have a limited life span, and given their age they also require capital spending, analysts said at the time.