APA power play a punt on Glencore Mt Isa metals mines
APA will pay AGL Energy $151 million in cash and assume $399m in debt for AGL’s interest in two power stations.
Gas infrastructure heavyweight APA Group has made a $550 million bet on the long-term future of Glencore’s ageing Mount Isa base metals mining complex, buying out its joint venture partner in two power stations in the region.
Under the deal announced yesterday, APA will pay AGL Energy $151m in cash and assume $399m in debt for AGL’s 50 per cent interest in the Diamantina and Leichhardt power stations.
About three-quarters of Diamantina’s capacity is contracted to Mount Isa Mines, a subsidiary of debt-laden mining major Glencore, which owns several mines, concentrators and smelters in the region.
APA managing director Mick McCormack said that while there was “a bit of pain” being felt in the commodities sector, he believed in the long-term outlook for the mines of Mount Isa.
“We’ve done our own work on the prospects for the region up there and we’re very comfortable as to the future,” he said.
“With this transaction, we’re concentrating some risk and we acknowledge that, but that said we are an infrastructure business, there are contracts over the asset, it’s been operational for quite some time and we’re entirely comfortable with respect to the long-term prospects for electricity generation up in the Mount Isa area.”
The power stations have contracts in place covering output out to 2030 with Glencore and Queensland government utility Ergon Energy.
APA upgraded its earnings guidance on the back of the deal. The three months of additional cash flow from the stations prompted it to lift its financial 2016 earnings before interest, taxation, depreciation and amortisation forecast to between $1.3 billion and $1.335bn. The company had previously forecast EBITDA of between $1.275bn and $1.32bn.
But the deal drew a cautious response from credit ratings agency Moody’s, which said the acquisition would be “credit negative” for APA.
Moody’s senior analyst Spencer Ng said he expected APA’s financial metrics to “weaken moderately” as a result of the deal.
“Moreover, we believe the transaction will also have a negative effect on APA’s business risk profile, given Diamantina’s higher counterparty risk and single asset nature compared with the group’s core pipeline portfolio,” Mr Ng said.
Diamantina was commissioned in late 2014 after being built by APA and AGL for about $700m.
Glencore last year decided to close its Lady Loretta zinc mine near Mount Isa in response to the price weakness. The Mount Isa copper smelter had been scheduled to close this year but Glencore in November last year announced it would be kept open until the end of 2022.
AGL’s decision to sell its stake in the stations is part of its efforts to shed $1bn in assets as part of a restructuring unveiled last year by chief executive Andy Vesey. The company has already sold a 50 per cent stake in the Macarthur wind farm for $532m as part of that process.
AGL chief financial officer Brett Redman said in a statement that Diamantina was not a “strategic asset” for the company because it was not connected to the national electricity market.
APA shares closed 1c lower at $8.50. AGL dropped 20c to $18.23.
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