Coronado interest in South32’s Illawarra operation

South32 chief executive Graham Kerr. Picture: Colin Murty

Speculation is mounting that Coronado Global Resources has been in bilateral talks with South32 about an acquisition of its $1bn-odd Illarwarra Metallurgical Coal operations.

It comes after Coronado staged an exit from the contest for BHP’s two Queensland coal mines, Daunia and Blackwater, expected to sell for more than $US3bn combined.

While delivering its recent result, South32 boss 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”.

Mr Kerr said there were currently a limited number of buyers in the market, when asked whether the group would wait until the BHP coal sale had concluded.

The responses were in the context of speculation in the market that South32 may once again be weighing a sale, as flagged by DataRoom last week.

Coronado said in its half-year result this month that its strong balance sheet meant it could pursue a number of inorganic opportunities, but was mindful that global economies and markets could be volatile, and any acquisitions would not sacrifice the company’s financial strength and stability.

After vying for BHP’s coal mines in its Macquarie Capital-advised contest, Coronado withdrew and there was talk that prices were too lofty for the group. This was despite operational synergies by owning the larger Blackwater asset that produces thermal and metallurgical coal, with its own Curragh open-cut coal mine 30km north in central Queensland.

Private equity firm Energy & Minerals Group owns about 50 per cent of Coronado and, based in Houston, it had been angling for a sale of Coronado to Peabody Energy last year before the talks collapsed.

Coronado produces metallurgical or coking coal used to make steel from its Curragh operations in Queensland, and from two US mines.

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

The asset produces 5497 kilotonnes of premium-quality hard coking coal annually 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 road and rail to the Port Kembla coal terminal, managed by South32 on behalf of a consortium.

Earlier, expectations were that the operation could be worth more than $1bn, and there was chatter about a year ago that a sale by South32 could be on the agenda.

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.

Both Dendrobium and Appin have a limited life span, and given their age they also require capital spending.

Final bids for Daunia and Blackwater have been received, and most are expecting that Stanmore Coal or Whitehaven Coal will emerge as the buyer of Daunia.

Other bidders which are thought to remain are BUMA and Peabody Energy, advised by Goldman Sachs.

Daunia makes sense for the UBS and Bank of America-advised Whitehaven, but it may acquire both assets, while Stanmore’s interest is believed to have centred on Daunia.

BHP has already sold its BMC metallurgical coal business in Queensland to Indonesia-backed Stanmore Coal for $US1.2bn ($1.7bn) in 2022, but opted to retain its Mt Arthur NSW mining operation after offers came in below expectations. It continues to generate strong cashflow.