The past year’s big run in coal prices is fading. With rates for benchmark products like Australian thermal recently sagging to $80/tonne — after a rise that took that commodity above $110/t in late 2016.

But a massive M&A deal this week shows that coal is far from dead. With one of the world’s biggest mining companies unveiling a $2.5 billion bet on a comeback for this space.

Coal
Photo by Pavlofox (Pixabay)

The firm is Glencore — which announced late Friday an offer to acquire Rio Tinto’s coal assets in New South Wales, Australia. Representing one of the biggest potential acquisitions the coal industry has seen in a long time.

Here’s the deal: Glencore is offering to pay Rio a full $2.05 billion up front. Then an additional $100 million yearly for five years — bringing the total transaction value to $2.55 billion.

And that’s where the story gets even more interesting.

That’s because Glencore’s offer is actually a counter-bid. Coming after Chinese coal miner Yancoal made an offer for the Rio Tinto coal assets this past January.

At that time, Yancoal had offered Rio $2.45 billion for the Aussie mines. But the buy-out contract stipulated that Rio could consider other deals, if those offers came at a higher value than the Yancoal bid.

Glencore apparently mulled its options for the past five months — and then stepped in with an 11th-hour bid that does indeed have a higher price tag. Meaning Rio now could legally take that offer, killing the Yancoal deal.

The next moves will be very telling. With Yancoal allowed to increase its offer in order to keep the deal alive — a move the company said overnight it is now considering.

If a counter does come, we could see a bidding war here. Signalling that good coal assets are still very much in demand from some of the world’s biggest mining firms.

And even if Yancoal bows out to Glencore, the big dollars coming under that deal will be a reassurance for the global coal sector. Watch for announcements from Yancoal on next steps, and for potential further counters from Glencore.

Here’s to dusting it off,

Dave Forest

Article by PiercePoints