gcl & yanzhou

Amazed at the lack of commentary on GCL on HC - I guess it's not held by many here - some news of interest, for those who are interested:

Gloucester Coal and China's Yanzhou should make a good fit

by: Bryan Frith
From: The Australian
December 21, 2011 12:00AM

PUTTING together the Australian assets of Yanzhou Coal and Gloucester Coal makes sense, but it's early days yet and it remains to be seen if the parties can make the numbers work.

Yanzhou on Monday announced that trading in its shares would be suspended on the Shanghai Stock Exchange because of a "proposed transaction", which prompted a local media report that the Chinese group was talking to Gloucester about a proposed $8 billion merger. In turn, this led to Gloucester obtaining a trading halt yesterday morning, pending an announcement "in connection with a possible change of control transaction".

Gloucester was not yet in a position to make an announcement, but hopes to do so before the expiry of the trading halt tomorrow morning. If the company is still not in a position to make an announcement it would need to obtain an indefinite suspension of trading.

Such a merger would provide a means of enabling Yanzhou to satisfy legally enforceable undertakings given to the Australian government to list its Australian activities on the ASX as a condition of foreign investment approval for the $3.3bn acquisition of the coalminer Felix Resources in 2009, while at the same time unlocking the investment of Gloucester's major shareholder, the commodities trader, Noble Group.

That in turn would free Noble to help in the development of other interests, including the iron ore miner Territory Resources, recently acquired by Noble, and coal exploration companies Blackwood and East Energy, in which Noble holds 40 per cent and 30 per cent stakes respectively.

Noble owns 65 per cent of Gloucester, but that is more a result of circumstances than desire. Noble is a trader and has never been interested in operating coalmines. It prefers to take strategic stakes, which helps to ensure the continued existence of a number of independent producers, no doubt in the hope that it will assist in maximising its opportunity to market the output of their mines.

Noble, for some time, held a 21.7 per cent stake in Gloucester, but was forced to defend its position when Gloucester proposed a reverse takeover of Whitehaven on terms that Noble considered undervalued its holding in Gloucester.

Noble countered with a takeover bid for Gloucester and ended up with 87.7 per cent of the company. Gloucester and Macarthur Coal then planned a merger that would have reduced Noble's stake to 25 per cent of the combined entity.

But that was foiled by a takeover offer from Peabody, which subsequently fell through. Peabody came back earlier this year with a successful $4.9bn takeover of Macarthur. Gloucester subsequently entered into related party transactions in which it acquired Noble's interest in the Middlemount coking coal project in Queensland's Bowen Basin and the Donaldson Coal thermal coal project in the Hunter Valley, which reduced Noble's stake to its present 65 per cent.

Yanzhou Coal is listed on the Hong Kong, New York and Shanghai exchanges and has a market capitalisation of almost $10bn.

However, its enforceable undertakings relate to its Australian assets, which had to be housed in an Australian company, Yancoal Australia. Moreover, Yancoal has to list on the ASX by the end of next year, with Yanzhou owning no more than 70 per cent. Yanzhou's economic interest in the Felix mines, some of which are owned by joint ventures, also has to be reduced to no more than 50 per cent.

Yanzhou has been examining an IPO, but with equity markets highly volatile and demand poor for IPOs, it has been looking at other possibilities, including a backdoor listing through the acquisition of a listed company.

Yancoal is known to have expressed an interested in acquiring Whitehaven earlier this year, but the parties couldn't agree on price and Whitehaven is now proposing a merger with Nathan Tinkler's Aston Resources and Boardwalk Resources to form a group with a market capitalisation of $5bn-plus.

Yancoal is now looking to Gloucester as a backdoor listing, which would satisfy its undertaking to list on the ASX.

A combination of the two groups makes commercial sense, as they share nearby coalmines in the Hunter Valley, which would produce synergy benefits.

Moreover, the acquisition of Donaldson Coal gave Gloucester excess capacity to ship coal out of Newcastle, while Yancoal needs additional capacity to enable it to meet its production expansion targets. The combined groups would have production capacity of more than 15 million tonnes a year.

Yancoal is said to be looking at a predominantly scrip offer, perhaps with a small cash component.

But one of the difficulties is that Yancoal at present is not listed, which means there is no established market value for its scrip against which a bid price could be measured.

Offering scrip that is not yet listed is not common, but is not unprecedented. Renison Goldfields tried it in 1995 by putting its gold assets into a newly formed Goldfields and using the scrip in that company to acquire Pancontinental Mining.

Smorgon Steel used a similar tactic in 1998, backdoor listing through a successful scrip offer for Australian National Industries.

It's thought that Yanzhou has a scheme of arrangement in mind, which would have to be promoted by Gloucester, and would probably mean that Noble and the other Gloucester shareholders would vote as separate classes. If so, the outcome would be determined by the shareholders other than Noble.

The scheme document would require sufficient information about Yancoal, including an independent expert's report, to enable Gloucester holders to form a view on the value of Yancoal and its scrip. The ASX also requires parties seeking to backdoor list to comply with the prospectus requirements as if it were an IPO.

But Yancoal first has to satisfy Gloucester and its adviser, Lazard, as to its value. Yancoal is advised by UBS and Citi.

Gloucester at present is capitalised at $1.4bn, with its share price falling from $12.80 at the start of the year to its present price of $7.03. The share price has fallen 14 per cent, from $8.20, since the start of this month.

To have any chance of success, an offer value would have to be in the range of $1.8bn (a premium of 30 per cent) to $2bn (40 per cent).

For the combined group to have a value of $8bn would require Yancoal to be worth at least $6bn.

Yancoal's balance sheet as at December 31, 2010 showed shareholders' funds of $568 million of which only $64m was contributed equity and $481m in retained earnings. But a whopping $397m of that retained earnings came from a foreign exchange gain last year (which may suggest that the company's borrowings are in US dollars).

Yancoal is heavily geared, with debt of more than $3bn and intangible assets of $2.3bn. Yancoal has made some recent acquisitions, including Syntech Resources, owner of the Cameby Downs mine and several coal tenements in Queensland's Surat Basin, for $220m and Premier Coal, acquired from Wesfarmers, for $300m.

But to get to a value of $6bn may mean a further significant increase in intangible assets.

To get the nod from Gloucester, there may be the need for some reduction in Yancoal's heavy debt load, perhaps through the injection of equity by Yanzhou.

http://www.theaustralian.com.au/business/opinion/gloucester-coal-and-chinas-yanzhou-should-make-a-good-fit/story-e6frg9kx-1226227106869