China’s Yancoal: a foreign investment risk?

Yancoal, a miner controlled by the Chinese government, is looking to buy up coal assets in the Hunter Valley, as well as a major stake in the world’s largest coal port in Newcastle. 

Foreign investment has long been a politically charged issue, but large scale acquisitions of Australian strategic assets by companies controlled by foreign governments understandably demand higher levels of scrutiny. 

For investors, it is important to be clear that Yancoal is not a normal commercial company. Ultimately, it is owned and controlled by the Chinese state, who want to use it to pursue their national interests.  

This is evidenced by Yancoal’s business strategy. Rather than trying to generate a profit, which the company hasn’t done in years, Yancoal has instead focused on a debt-fuelled spending spree, shedding hundreds of Australian jobs in the process.  

For this latest venture it wants to raise $3.2 billion in equity, which is significantly more than the value most analysts have placed on the Hunter and Newcastle assets.  

Fresh doubts have now been raised about Yancoal’s ability to pay after they failed to meet the purchase deadline for an upfront payment. Yancoal has instead opted to pay off their intended purchase through a series of installments costing over $100 million more. 

Some analysts have suggested the Chinese government are prepared to prioritise access to coal over securing a healthy rate of return.

This deal, which if successful would make Yancoal Australia’s largest coal-only miner has already prompted serious concerns among investors, policymakers and mining communities.

Policymakers are worried about the Chinese state controlling a major stake in one of Australia’s most important ports. Investors are concerned by comments made by Yancoal’s parent company about wanting to have power over the price of Australian coal exports. Mining communities in the Hunter, who are well aware that Yancoal is paying over the odds for these assets, fear the company will try to return to profitability by cutting jobs and entitlements – as they have in the past. 

Like other recent Foreign Investment Review Board decisions, this is is an issue of national significance and the impact on jobs and on Australia’s long-term geopolitical interests have to be scrutinised not just rubber-stamped.