Rio Tinto will secure up to $US600 million ($804m) above the value of its Hunter Valley coal assets in its $US2.45 billion Coal and Allied sale to Yancoal Australia, even without including a potential $US650m royalty, according to independent expert Ernst & Young.
In the lead-up to shareholder meetings in London on June 27 and Sydney on June 29 to approve the deal, Rio has released an independent expert’s report it commissioned on the deal.
While Scott Morrison has approved the sale, it remains subject to some government approvals and, more importantly, Chinese-backed Yancoal obtaining the cash in an equity raising to make the purchase.
EY directors Michael French and Ken Pendergast valued the coal assets at between $US1.82bn and $US2.17bn, saying this made it a “fair and reasonable” deal for Rio shareholders.
The pair said there was little chance of a better offer emerging, after Rio conducted an extensive auction process that saw Yancoal outbid Rio’s Hunter Valley neighbour Glencore, which has long-targeted the mines.
To be fair to Chinese-controlled Yancoal, which still needs to convince equity funders it is not paying too much, EY referenced potential benefits Yancoal could extract beyond its valuations.
“Few other acquirers could extract the same value from Coal & Allied as Yancoal,” EY said.
The benefits are synergies from other Hunter Valley mines (which Glencore also has) and Yancoal’s previous tax losses, which are on its books as deferred tax assets and which could be realised faster with Coal & Allied’s profits.
Beyond the $US2.45bn sale price is a 2 per cent royalty on revenue from 2020 to 2030 if thermal coal prices are above $US75 a tonne, inflation adjusted. The royalty is capped at $US650m.
EY puts no official value on the royalty, which ensures Rio will get value if coal prices rise, because $US75 (inflation adjusted) remains higher than any present analyst forecasts.
While the report probably does not help Yancoal’s fundraising efforts, when deals on top-quality assets like this are reviewed in hindsight, they normally pass or fail on future commodity gains or falls, not the question of whether the price paid was 10-20 per cent too high.
In its valuation, EY is forecasting thermal coal prices of about $US60 a tonne.
Rio shareholders are voting because Rio’s major shareholder, with a 10.1 per cent stake, is the Chinese state-owned Chinalco. Yancoal is 78 per cent-owned by Hong Kong-listed Yanzhou Coal, which is 56 per cent-owned by China’s Yankuang.
Yanzhou has said it will subscribe to $US1bn of equity in the raising, which would see its stake diluted. EY said Yancoal remained in discussions with third-party investors and underwriters for the remaining funds.
In the meeting booklet, Rio’s exiting chairman, Jan du Plessis, said Yancoal was expected to raise the equity in the third quarter.