More coal asset sales on the cards as South32 gets cracking price for Illawarra Coal

The significant sale price achieved by South32 raises the prospects of more coal assets coming to market.

The $US1.65bn ($2.5bn) price South32 achieved for the sale of Illawarra Metallurgical Coal has been described around the market as a knockout one and adds to the anticipation that private equity firm EMR Capital will now bring its Kestrel mine to market to capitalise on the momentum.

Both this deal and the sale last year of BHP’s Queensland coal mines to Whitehaven Coal show that quality metallurgical coal mines are in strong demand, particularly from the Asian market.

It’s despite a fall of about 14 per cent in the metallurgical coal price futures to $US308.3 a tonne from a year ago when global energy concerns surrounding the Russia-Ukraine war caused the commodity price to soar.

The evidence for this was seen last year by the list of underbidders in the BHP auction for Daunia and Blackwater coal mines, which included BUMA and Stanmore Coal.

Not only will EMR Capital be helped by the high price, but Whitehaven Coal as well, as it continues in talks to sell a 20 per cent interest in its Blackwater coal mine to Asian steel producers in order to help fund the BHP acquisition priced at up to $US4.1bn.

It is understood that at the time of the BHP auction for the two mines which were for sale, BUMA Energy offered the highest price in the process but could not obtain the funding.

A smaller deal may be one that can be more easily financed.

Kestrel is the world’s largest underground coking or metallurgical coal mine, producing about 7.1 million tonnes of coal annually which is used to make steel throughout the world. It is located in Queensland’s Bowen Basin, 51km northeast of Emerald.

A sale could also soon happen for Pembroke Resources’ Olive Downs in Queensland’s Bowen Basin, which can deliver up to 20 million tonnes of coal per annum.

As earlier reported by DataRoom, Anglo American is a major owner of valuable coal assets in Australia, but is not believed to be a seller, as is Glencore which is considering a spin-off of its interests in coal mines globally.

Working on the Illawarra Metallurgical Coal sale to Stanmore Coal backer Golden Energy Resources and Matt Latimore’s M Resources is Bank of America and law firm Herbert Smith Freehills.

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, which produce semisoft coal, unlike the premium quality hard coking coal at the IMC Appin and Dendrobium underground 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”.

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

The price equates to 7.2 times annual free cashflow for IMC and is about four times what analysts at Barrenjoey had been expecting – based on a coal price of $US240 a tonne – at $US440m stripping out remediation liabilities or $US660m.

Golden Energy is owned by Indonesia’s Sinar Mas and has made efforts to buy 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 and are produced for steelmaking globally.

Illawarra Coal produces 5497 kilotonnes of metallurgical coal annually.

India’s steel producers are delivering 10 million tonnes of steel per annum, which requires 6 million tonnes of metallurgical coal.

Shares closed more than 4 per cent higher on the news.