As Anglo American prepares to receive the first round of bids for its coal assets this week, the miner will be braced for the offers to be impacted by the devastating fire at one of the flagship mines.
The coal sale will be a crucial test of Anglo’s ability to deliver on its ambitious disposal programme launched after it spurned BHP’s £39bn unsolicited takeover attempt earlier this year.
The sale, which includes five coking coal mines in Queensland, Australia, was widely expected to fetch between $4bn and $5bn. However a fire in June at Grosvenor, its largest mine, has complicated the deal.
Potential bidders include Peabody, Yancoal, Glencore and more than a dozen others, according to people familiar with the process. But with the underground coal fires still smouldering, there is uncertainty over when the mine can reopen. Some offers may include payment structures contingent on the state of Grosvenor, said bankers.
“The fire under the ground is serious . . . it will definitely impact the process and the valuation,” said one banker.
Anglo’s share price is currently 33 per cent below BHP’s final all-share offer in May, which valued the company at £31.11 per share. The company is under pressure to demonstrate to shareholders that its strategy will deliver shareholder value.
“Anglo American has promised the world that it would restructure its complicated asset portfolio, and ditching the last of its ESG-unfriendly coal assets is a key part of this strategy,” said Tom Price, analyst at Panmure Liberum.
In addition to the coal sale, the 107-year-old company plans to sell or IPO its De Beers diamond business, divest its nickel mines, and spin out its platinum business in South Africa — all by the end of next year.
Grosvenor is the most valuable mine in the package, accounting for about a quarter of the total value, according to analysts. Jefferies calculate that the fire has wiped off $1bn from the value of the coal assets, which are now worth $3.4bn, based on the assumption that Grosvenor does not reopen until 2027.
However, analysts at Panmure Liberum who put the value of the coal mines at around $4.5bn, have kept their valuation on the expectation that the fire would have been extinguished before the sale, and that the reserves are intact.
At present, the mine, in Queensland’s Bowen Basin, remains sealed and Anglo says that “monitoring suggests that the fire has now been extinguished” although the temperature inside remains very high. Anglo said it has made “significant progress” at the site, which has a dedicated team working on maintenance and “ongoing sealing” activities.
Speaking to the Financial Times in July, after the fire broke out, chief executive Duncan Wanblad said that the interest in the steelmaking coal assets “has been very, very good.”
“Even post the fire, many of those parties have come back to us and said ‘we’re still very interested and also interested with Grosvenor in the picture’,” he said.
Anglo has said it wants to get a coal asset deal agreed by January.
Steelmaking coal, also known as coking or metallurgical coal, is a key ingredient for steel mills, and has been a top focus in mining deals in recent years, led by Glencore’s $6.9bn acquisition of Teck’s coking coal mines.
Buyers have been emboldened by the relatively slow development of low-carbon steelmaking methods, which will mean demand for steelmaking coal will last longer than some had anticipated at the start of the decade.
A shift in shareholders’ attitudes towards coal is also supporting interest, as environmental mandates are fading, and mining companies say their investors are now more comfortable with coal ownership.
Glencore, which is the world’s largest listed thermal coal producer, reversed its plan to demerge its coal business, owing to changing shareholder views.
There has also been a land-grab in Queensland’s lucrative steelmaking coal industry, as the country’s largest integrated miners have sold out to specialist players at healthy valuations.
BHP sold two Queensland mines to Whitehaven for US$3.2bn last year as it reshaped its portfolio, a deal that closed in April. South32 this year also sold its Illawarra Metallurgical Coal for US$1.3bn.
Yancoal, an ASX-listed coal miner which is controlled by China’s Yankuang Group, also bid for those assets having acquired a number of mines including Rio Tinto’s coal mines in 2017 for US$2.7bn.
Yancoal has said it is interested in further acquisitions, and it held back its dividend last month to help build up its war chest. The company is expected to be one of the top bidders for Anglo’s coal assets, but could face political opposition owing to its Chinese ownership, according to people close to the deal.
The value of Australia’s coking coal assets was put into perspective last month when two Japanese steelmakers paid US$1.1bn for a 30 per cent stake in Whitehaven’s Blackwater mine, previously owned by BHP, as the Asian investors looked to secure supply. The price was higher than anticipated by some analysts.
Prices for coking coal have been soft this year because of a global glut of steel and a slump in Chinese construction. However miners and steelmakers expect a shortage of high-quality metallurgical coal in the longer term, leading to a rush for assets.
The talks over the Anglo sale coincide with a state election in Queensland with the Labor party, which introduced a sharp rise in the royalties that mining companies have to pay, behind in the polls. The opposition Liberal National Party has not indicated it will lower the royalties however, a move that could boost the value of the miner’s assets.
