Yancoal’s 20pc crash is about more than a missing dividend

Queensland and NSW’s big coal miners have their eyes up, knowing consolidation makes sense and could create value for investors.

Aug 20, 2024 – 2.46pm

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Back up the truck, the coal deals are coming. Big listed miner Yancoal sent the canary down the coal mine when it hoarded all $420 million profit it made in the past six months for “potential corporate initiatives”. That’s company speak for M&A.

Someone had to do it. Because from what we hear, Queensland and NSW’s big coal miners have their eyes up, knowing consolidation makes sense and could create value for investors.

When it comes to coal, it’s get big or get out – which explains why Yancoal is hoarding its profits. David Rowe

The first trigger is Anglo American’s up-for-sale Queensland coal mines – which the bankers want us to think are worth $7 billion or more, but coal punters say will change hands for significantly less, given issues at one of the sites. Yancoal is a bidder, while Glencore, the country’s largest coal producer, is also on the prowl, as are others.

Yancoal wants Anglo American’s mines enough to cut its own dividend to zero – a move that sent the shares down 20 per cent on Tuesday and wiped $2 billion from its market value. It was the most notable crash so far this reporting season.

It was a big overreaction – the $9.2 billion Yancoal isn’t even the auction’s early favourite – but a good reminder that non-strategic shareholders want cash returns out of their ASX-listed coal miners. Companies like Yancoal cannot afford to skip even one payment.

RELATED QUOTES

NHCNew Hope Corporation

$4.880 -2.01%

1 year1 day

Aug 23Nov 23Feb 24Aug 244.2004.8005.4006.0006.600

Updated: Aug 20, 2024 – 3.46pm. Data is 20 mins delayed.

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YALYancoal Australia

$6.000 -13.79%

Aug 23Nov 23Feb 24Aug 244.5005.2506.0006.7507.500

WHCWhitehaven Coal

$7.290 -1.62%

Aug 23Nov 23Feb 24Aug 246.0006.7507.5008.2509.000

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Once Anglo American’s auction is run and won, we wouldn’t be surprised to see some corporate deals – think Whitehaven Coal/New Hope, or even Yancoal itself merging with one of the other big listed groups to create an Australian mega-coal champion. They are the ASX’s big three coal miners. The fourth (and smallest) is Stanmore Resources, worth nearly $3 billion.

Why now? It’s get big or get out in oil, gas and coal globally. We’ve seen it in Australian oil and gas (when Woodside Energy was in talks to acquire Santos, for example) and US shale and Australian coal, where the latest action has been more about getting bigger by buying coal assets off diversified miners – think BHP, Rio Tinto, South32 and now Anglo – than company takeovers.

But once Anglo’s portfolio has traded, and assuming Glencore sticks with its highly profitable coal business, the bulk of that activity will be done. What, then, drives growth?

Bigger is better

The prize is about opening up a bigger world of investors and catching the strong passive investment wave that has transformed equity markets. Yes, some ETFs will not go anywhere near coal, but the bulk of them do; Whitehaven’s biggest investor is Vanguard, for example.

Stockbroker Angus Aitken, of Aitken Mount Capital Partners, has been parroting this line for a while. “We like the idea of combining these coal companies into far larger beasts that become significant index weights,” he says. “Given 35 per cent of ASX equities money is in index funds, the larger your market cap the larger the index fund demand.”

What’s the point of having four or five separate ASX-listed coal miners on low enterprise value/EBITDA multiples comparing themselves to each other, as he puts it?

“Putting together a very large player will get you a far higher multiple in time in our view and a $20 billion market cap leading coal producer on the ASX with large free cashflows and earnings is something the market would very much like,” says Aitken.

This is something we’ve also heard from resources fund managers, who dip in and out of the ASX’s coal stocks and have studied Whitehaven, Yancoal, New Hope and their underlying assets in Queensland and NSW’s Hunter Valley for years.

Further to Aitken’s point on multiples, investors point to costs. Why pay for a New Hope head office in Brisbane when its mines are in NSW’s Hunter Valley and regional Queensland, or Whitehaven’s Sydney office when its assets are in regional NSW and Queensland? You could have one office looking after the lot.

A bigger company should also promise larger, more reliable dividends. And listed market investors love their dividends – just ask Yancoal, which was smacked in the face with that reminder on Tuesday.

The hard part is always price, and finding something that works for strategic investors that have mobbed coal companies’ registers – Yancoal is controlled by Chinese interests, Stanmore by Indonesians and New Hope by Australia’s Soul Patts. But who says strategics don’t like higher share prices?

The other part is FIRB approvals – and that’s something Yancoal will have to battle should its early interest in Anglo American’s mines go further. Sellers like Anglo American value certainty in auctions, which can mean getting regulatory approvals upfront. That played into Whitehaven’s hands last year when it bought BHP’s coking coal mines in Queensland.

It will be interesting to see whether the corporate activity catches on.

Coal is one of those industries where one deal can spark a frenzy, as we saw a decade ago when Whitehaven Coal bought Aston Resources and Yancoal acquired Gloucester Coal, almost in lockstep. Those deals created what are still the ASX’s two biggest coal producers, while New Hope, worth $4.2 billion and part of the Soul Patts family, is No.3.

These miners are now much bigger than they were, and making huge profits. They’ve piled those profits into dividends and expansion, including buying those mines off BHP, Rio Tinto and others. But what comes next?

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