Yancoal’s funding challenge to pay Mitsubishi for Rio mega-deal

Chinese-state miner Yancoal’s funding problems just got worse, after it offered US$710 million for Mitsubishi’s stake in a coal mine in Australia’s Hunter Valley.

Yancoal, which has not made a profit since 2012, is already having to find US$2.45 billion to finance a planned acquisition of Rio Tinto coal assets in Australia.

As analysts expected, that bill has now grown to over US$3 billion, thanks to Mitsubishi’s decision to exercise its “tag-along” right, as the owner of a 32.4% stake in one of the Rio’s mining assets.

Concern is growing that Yancoal will not be in a position to raise the funds needed to complete the acquisition. Its parent company, Chinese state-owned Yanzhou Coal, has pledged to contribute only $US1 billion, following a tightening up of Chinese rules on foreign acquisitions.

Help is unlikely to come from Yancoal’s second biggest shareholder, Noble Group after its credit rating was downgraded. Standard & Poors commented that it would be “difficult” for Noble to participate in the raising.

This leaves Yancoal with around $2 billion to raise, yet many market players will regard the loss-making firm as a high-risk investment. Having run up US$1.7 billion worth of losses over the last four years, Yancoal investors have lost 17.7 c for every dollar they have put in.

The miner also enters the deal carrying five times as much debt as comparable companies.

Yancoal’s share price has fallen by almost half since the start of the year, from 49.5c on January 31 to 26c today.

Security analysts have warned that increased Chinese influence over Australian coal exports could have long-term ramifications for the Asia, potentially threatening Japanese energy security.