Yancoal’s latest Australian venture is a risky proposition

Chinese miner Yancoal is trying to raise AUD $3.2 billion in equity to buy a significant stake in Rio’s Australian coal business.

Mainstream banks have already ruled out participating in funding rounds of this kind and major investors, conscious of the Yancoal’s weak balance sheet, are also wary.

The company currently carries five times as much debt as comparable competitors, and its debt has previously caused it to lose ownership and control of three mines in the same region as the Rio Tinto assets.

With the company having run up $1.7 billion in losses over the last four years, Yancoal investors have lost 17.7 cents for every dollar they have invested.

Yancoal quietly announced yet another shortfall this week, posting losses of $227 million in 2016.

Any expectation that China could bail out Yancoal is likely to be misplaced.

Its parent company Yanzhou is also debt-laden, with ratings agency Moody’s assigning it a junk credit rating (B2) and a negative outlook.

This explains why Yancoal executives, roadshowing the deal to Asian investors, are now claiming to be only “testing the market’s appetite” for the deal.

As well as convincing investors to buy in, Yancoal also faces several commercial and regulatory hurdles.

The deal is first subject to a shareholder vote and approval, and must also be signed off by Australia’s powerful Foreign Investment Review Board (FIRB). FIRB has a history of blocking Chinese investments in Australian assets considered to be of national significance, and financial experts are predicting that the deal is likely to face stiff political resistance.

In addition to getting approval in Australia, the Korean Fair Trade Commission and a power generator in Thailand must also consent to the transfer of supply agreements into Yancoal’s name.