Australia’s fickle foreign investment regime could impact Yancoal acquisition

On 29 June, Rio Tinto’s shareholders met to give their final approval to the sale of the Australian Coal & Allied assets to Yancoal, a Chinese government owned coal company.

However, despite Yancoal’s apparent confidence, it has yet to demonstrate how it is going to fund the planned acquisition, and has previously been criticised for not being able to show how it would raise the equity.

Investors, including Yancoal’s second largest shareholder Noble Group, have been wary of getting involved in the deal and are unlikely to participate in any fundraising.

Additionally, despite significant trade ties between Australia and China, Australia’s approach to foreign investment can be inconsistent due to a volatile political landscape.

This is most clearly demonstrated by the 5 changes of prime minister in 5 years, and party leaders increasingly wary of being on the wrong side of public opinion even temporarily lest they lose their position.

Rising nationalist feeling in Australia and populist politics has the potential to lead to increased levels of protectionism, harming inbound investment into the Australian market.

The situation surrounding Darwin Port, which is owned under a 99-year lease by Chinese-owned Landbridge, demonstrates the fickle nature of Australia’s foreign investment policy.

A 20 per cent stake in Darwin Port was meant to be sold to a domestic company, but giving the growing political unease over Chinese investment in Australia, will now be held by the Northern Territory government to give it influence over the port leadership.

Despite not requiring approval from the Foreign Investment Review Board (FIRB) when the deal was first struck, sentiment shifted and the acquisition became the driver to overhaul foreign investment rules.

This same sentiment, which has not only risen in recent times, has the potential to upset major deals that are currently underway.

The Coal & Allied deal, which has already received FIRB approval, would make Yancoal the largest pure-play coal producer in Australia.

However, there is continued focus on the Chinese company’s debt levels, questioning whether the miner can afford the acquisition with its net debt position of around US$5bn.

Whilst Yancoal has secured FIRB approval, it remains only a recommendation and the government may still choose a different path. There is a risk the government may decide it does not want to let the deal move forward.

It would not be the first time Australia has made a decision against Yancoal. In 2014, the Australia Takeovers Panel blocked Yancoal’s efforts to raise approximately US$2.3bn in equity, citing vague “unacceptable circumstances”.

China’s hope that Australia’s foreign investment regime is stable enough to shepherd through politically controversial mining investments could be seen as risky. Chinese companies have been caught off guard in the past by shifts in political attitudes after already receiving what they believed were sufficient approvals. Investors are right to remain wary.