Yanzhou walks, taking our foreign investment credibility with it
After successfully lobbying to overturn the conditions of its foreign investment approval, Chinese coal major Yanzhou has abandoned its takeover of Yancoal, Glenn Dyer and Bernard Keane write.
Yesterday’s abandonment by Chinese coal major Yanzhou of its full takeover of its Australian associate, Yancoal Australia, has left a hole in Australia’s credibility on foreign investment regulation.
Yancoal Australia is the old Gloucester Mining but is more accurately seen as the local vehicle for Yanzhou. In 2009, Yanzhou was allowed by the Labor government to acquire Felix Resources, on the basis that it be listed and headquartered locally via Yancoal and sell down its stake in Yancoal to below 70%. In 2012, then-treasurer Wayne Swan gave Yanzhou an extra year to sell down its stake when it picked up Gloucester.
But last December, Treasurer Joe Hockey succumbed to intensive lobbying from the companies and allowed Yanzhou to renege on the 2009 selldown commitment. Yanzhou had a 78% stake in Yancoal and instead proposed offering securities valued at $151 million for the outstanding 22% of the Australian company, based on share prices before the initial offer was made last July. Hockey had finally approved the mop-up on December 11 last year, saying Yanzhou had requested that the conditions on its Yancoal investment be lifted:
“In commitments provided to me, Yanzhou has undertaken to continue to support Yancoal’s ongoing operations in Australia, thereby maintaining its position as a major regional employer. So long as Yanzhou continues to own at least 51% of the shares of Yancoal, Yanzhou will ensure Yancoal continues to operate so that it remains solvent. In addition, Yanzhou will extend its existing loans to Yancoal if required, and will support Yancoal’s plans to expand the Moolarben open-cut mine.”
The decision was only a few days after Hockey’s “Australia is closed for business” decision to block Archer Daniels Midland’s acquisition of GrainCorp. Hockey also lifted conditions requiring Yanzhou to reduce its holdings in Felix Resources to less than 50% by the end of the year, and to reduce its interest in the Syntech Resources and Premier Coal mines to less than 70% by the end of next year.
Yancoal’s Canberra lobbyist was Bespoke Approach, the lobbying firm of former Liberal party staffer Ian Smith and former Labor senator Nick Bolkus — and until recently, noted friend of Chinese business interests Alexander Downer.
At yesterday’s Yancoal closing price of 58 cents, the value of Yanzhou’s offer had fallen to less than $130 million — if it had proceeded with it. But in a one-paragraph statement issued yesterday afternoon, Yanzhou simply announced it was abandoning the bid. No explanation, no apology — it just didn’t wish to pursue it.
The condition of the Chinese coal industry was bad back in December. It was worsened since. And the health of the Australian coal industry was also poor last December, and has not improved in the first quarter of 2014, with prices drifting lower. They hit a five-year low last week of less than $80 a tonne.
“The share prices of China Coal, Yanzhou and Shenhua Energy are now around their lowest levels on record.”
Looking at the most recent figures for Yancoal, released last month, and then recent commentary about the outlook for China’s coal industry, its not hard to find the motivation for abandoning the mop-up. Yancoal is a loss-maker facing a red ink future, and the Chinese industry’s prospects are not much better. Chinese coal consumption rose 2.6% in 2013, but that’s a third of the rate of growth in GDP. The biggest coal group, China Coal, warned in January that it was looking at a 65% slide in earnings for 2013.
The share prices of China Coal, Yanzhou and Shenhua Energy are now around their lowest levels on record. All three have high debt and face increasing pressures to service it as coal prices and demand ease. The terrible smog problems on February and early this month across much of northern China haven’t helped the image of coal producers. And Yanzhou last week reported a sharp slide in 2013 profit, which fell nearly 80%from 2012’s level, hit by falling coal prices and the slide in the Australian dollar.
And Yancoal itself had a rotten 2013. It reported operational earnings before interest, tax, depreciation and amortisation (EBITDA) of $43.7 million and an EBIT loss of $227.1 million for 2013, compared to an EBITDA of $154.1 million and EBIT loss of $37.7 million in 2012. For the full 2013 year, including write-downs and losses, the company reported an after-tax loss of $832.1 million, including $226.7 million of impairment charges and $258.7 million of foreign exchange movement on the outstanding US dollar loans. With that sort of red ink and facing a weak outlook this year, Yancoal shares have been held up above 60 cents by the impending Yanzhou offer. When that disappeared yesterday, Yancoal shares finished down 9.4% at 58 cents, compared $1.24 in July last year.
They were trading around 76 cents when Hockey made his decision, but were 65 cents about a week before Hockey’s approval. The fall from $1.24 in July to 65 cents in early December should have told Hockey and his advisers that the market was signalling something was wrong. News out of Hong Kong overnight suggested it was the 13% shareholder in Yancoal, the Noble trading house, that effectively sank the bid. Noble has been opposed to the Yancoal mop-up pricing and wanted Yanzhou to lift the value of its offer. Yanzhou always needed Noble’s acceptance to complete the mop-up.
In the end, it was for nothing that Hockey reversed his predecessor’s decision, and sent a signal to investors that the government’s decisions on foreign investment conditions — which already an uncertain “black box” within which the outcome can never be certain — can be overturned if your lobbying is good enough. Yanzhou failed to follow through. Hockey’s rationale for changing the conditions of approval was that economic conditions have deteriorated in the coal industry. But now, it seems, they’ve deteriorated so badly that Yanzhou doesn’t want to waste any more of its money.
Hockey might be less than impressed when the next lobbyist walks through his door to plead for a relaxation of Foreign Investment Review Board conditions.