Yancoal, a subsidiary of Chinese state-owned Yanzhou Coal, has cleared the first hurdle in its bid for Rio Tinto thermal coal assets in Australia’s Hunter Valley. The miner says it has now received approval from the Australian Foreign Investment Review Board for the $3.2 billion planned acquisition.
But having bid high for the assets, analysts now expect it to struggle to raise the necessary equity. China is cracking down on extending funding to large acquisitions outside of China and Yancoal’s parent company has said it will only provide $1 billion of the required funding.
Many investors will regard Yancoal as a risky proposition. Compared to its peers, the company enters the deal with an extremely high debt burden from previous acquisitions, having not posted a profit since 2012.
The company’s debt burden has previously caused it to lose control of three Australian mines, resulting in hundreds of local job losses.
Yancoal posted another annual loss in March, reporting net debt of almost $3.7 billion. This comes in spite of a 130 percent increase in the price of thermal coal between February and October in 2016, and corporate income tax benefits worth $84.7 million.
With mainstream banks having already ruled themselves out of funding rounds of this kind, it remains to be seen whether Yancoal can spark the interest of other investors.
Should the deal collapse however Yancoal will be able to walk away without suffering a huge financial penalty. Rio has set the termination fee at just $23.5 million.