Yancoal is building a takeover war chest as it hunts for the right deal
Yancoal is building a war chest for any coal deals which present themselves, but its shares plunged 20 per cent after the dividend tap was turned off.
China-backed Yancoal will mount an assault on Australia’s $60bn metallurgical coal industry, building a $1.5bn war chest for a move which could catapult it into one of the nation’s leading producers amid surging Asian demand.
The company known for its thermal coal mines is expected to table an offer for Anglo American’s local metallurgical coal division, which was put on the sale block earlier this year with price expectations in the $US5bn ($7.4bn) range, with bids for those assets expected by September 9.
A successful buyout would instantly transform Yancoal into one of the top three steelmaking coal producers globally if bought out in their entirety.
Anglo’s Queensland mines produced 15 million tonnes of coal last year with plans to hit 20 million tonnes a year by 2026.
Any deal, if successful, would be the second company-transforming transaction pulled off by Yancoal, following its $US2.45bn purchase of Coal & Allied from Rio Tinto in 2017, which brought the Hunter Valley operations and Mt Thorley Warkworth into the business.
But while Yancoal chief executive David Moult was at pains to emphasise the significant benefits that would flow to shareholders from any such deal, investors were unimpressed after Yancoal revealed it had suspended dividend payments to shore up the balance sheet.
The stock tumbled more than 34 per cent from Monday’s close at one point before recovering to close 14.5 per cent lower at $5.95, on about 10 times normal trading volume.
The stock plunge, which began to play out during a morning conference call with shareholders and analysts, led Mr Moult to reassure shareholders that the new strategy was the best way forward.
He said the company already had the “the three best thermal coal mines in Australia’’, but wanted to balance its portfolio with metallurgical coal assets.
In the first half of 2024 Yancoal produced 15 million tonnes of thermal coal but just 2.6 million tonnes of metallurgical coal, which commands higher prices and is in favour with market watchers given strong demand among Asian buyers.
Morgan Stanley said metallurgical coal “moves to our top pick (in the commodities space) as India maintains its strong steel growth trajectory, and Australian supply lags, setting the scene for a seasonal tightening into the fourth quarter’’.
Mr Moult said the company needed to be ready to strike if an opportunity arose.
“I think that it’s really being in a strong position to take advantage of whatever opportunities might present themselves to us,’’ he said. “It’s not for me to comment on specific situations that may be there. However, we’re very conscious that there are opportunities out there.
“We want to be in a strong position. We want to be in a position where we can respond, and we want to be in a position where we can respond in a way where we can acquire, if they become available, assets that will add further value to shareholders.’’
Yancoal has paid dividends fairly consistently since the 2017 transaction, with $1.22 a share paid out over 2022 and 69.5c a share last year, including a 37c-a-share interim dividend.
Mr Moult said the company over the past six years had paid out $2.5bn of franked and $1.8bn of unfranked dividends.
“A total of $4.3bn – this total is approximately 50 per cent of our $8.7bn market cap at the end of June, or closer to 60 per cent if you factor in franking credits,’’ he said.
“Over the past 20 years, we have grown through acquisition and expansion.
“We have a very capable team that continually looks at growth opportunities for the business,” Mr Moult added. “At this time, we will not be drawn on speculation of our specific scenarios.’’
Mr Moult said Yancoal was debt free with more than $1.5bn in cash at the end of the half, and no interest-bearing debt.
He said Yancoal was in a “very strong position” to execute on a deal that might present, but would not be drawn on how much the company might spend. However, there was a clear preference for metallurgical coal assets over thermal coal.
“We’ve made it quite clear over recent times that our preference would be for metallurgical assets if they became available,’’ Mr Moult said.
“We do look at other thermal assets, but at the end of the day we’ve got, in my opinion, the three best thermal coal mines in Australia. “They are our three tier-one operations that account for around 80 per cent of everything we do. What we would like to do is balance that portfolio.’’
Following the share price plunge on Tuesday, company management also assured shareholders that if no deal was done, the cash remained on the balance sheet to their benefit.
Meanwhile the company’s first-half profit fell by more than half on the back of weaker coal prices. Yancoal reported a net profit of $420m, compared with $973m for the previous corresponding period, down 57 per cent. Revenue was 21 per cent lower at $3.14bn.
Yancoal said its overall average coal price fell 37 per cent from the price achieved in the previous first half, down from $278 a tonne to $176 a tonne.
This was “mainly as a result of a decrease in global US dollar coal prices, with the weekly average Globalcoal Newcastle Thermal Index decreasing by 35 per cent per tonne during the period’’.
Yancoal said it had been focused on cost reductions, and had reduced its production price per tonne, excluding royalties, from $109 to $101.
“The decrease is primarily due to the increase in saleable production volumes, being partially offset by continued inflationary cost pressures,’’ Yancoal said.
“The group’s attributable saleable production guidance for the full year is between 35 million tonnes and 39 million tonnes,’’ Yancoal said.
“Attributable saleable production for the first half of the year is 17 million tonnes, with the group’s production expected to be significantly skewed towards the second half of the year.’’
Yancoal said it was also looking at brownfields expansion opportunities within its portfolio.
“In the year ahead, the group will continue to focus on exploration and potential expansion works across the tier-one assets of Moolarben, Mt Thorley Warkworth and Hunter Valley operations, to be funded from operating cashflows,’’ the company said.
“The Mt Thorley Warkworth underground mine pre-feasibility studies are subject to further assessments, including synergies with the open-cut which should conclude in 2024, likely leading to a feasibility study in 2025.
“Should the development proceed, it could significantly extend the future production profile.’’