Glencore Buys Coal Assets in Australia

Glencore will pay $1.7 billion to acquire majority stakes in Hail Creek mine and Valeria resources

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On Tuesday March 20 Glencore Plc (GLEN.L, Financial) has informed its shareholders through its website about the acquisition of some metallurgical coal mining interests and resources of Rio Tinto plc (RIO, Financial) in the North-eastern part of Australia.

For a total amount of $1.7 billion to be paid to Rio Tinto in cash, Glencore Plc will have an 82% interest stake in the Hail Creek mine which is located in the Bowen Basin region (Queensland) and a 71.2% interest stake in the Valeria coal resources (central Queensland). With this transaction Glencore will also buy the coal resources which are contiguous to the Hail Creek mine.

The closing should be sometime during the second part of 2018.

If the joint venture companies decide to sale their stakes to Glencore, the Anglo–Swiss multinational mining and commodity trading company will have to increase its payment of an additional amount until $340 million. That is according to co-sale rights contractual obligations for the remaining 18% interest stake in Hail Creek.

Hail Creek produces coking and thermal coal that is traded abroad. The mine supports the country’s export with approximately 9.4 million tonnes of coal every year. Hail Creek asset “is a large-scale, long-life and low-cost mine”, reports the company, that in 2017 contributed to Rio Tinto’s financials with a $408 million worth ebitda. That translated to a nearly 3% of Rio Tinto’s income before tax for full fiscal 2017 of $12.82 billion.

Glencore will add its total mineral resources with 142 million tonnes of proven and probable coal reserves from Hail Creek and with 762 million tonnes of JORC resources from the Valeria thermal coal deposit.

Glencore Plc already has 17 operational mines, which are located in Queensland and New South Wales. The contribution of those assets to the company’s total production of commercial coal for full fiscal 2017 equalled 87 million tonnes.

Glencore is an important contributor to the economy of Queensland since the company gave job to over 7,300 workers last year and spent about $3.2 billion cash for investments, taxes and salaries paid in the Australian land.

As of March 20, Yahoo Finance’s chart tells that Glencore and Rio Tinto lost nearly 6% year to date outperforming the Van Eck Vectors Gold Miners ETF (GDX) by 4%:

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Source: Yahoo Finance

Glencore Plc has a price-book (P/B) ratio of 106.45 times and an EV-to-Ebitda ratio of 7.32 times. While Rio Tinto plc has a price-book (P/B) ratio of 1.93 times and a negative value for the EV-to-Ebitda ratio of 5.34 times.

The industry has averages of 2.06 and 9.90 times for the two aforementioned ratios.

(Disclosure: I have no positions in any security mentioned in this article.)