(The author is a Reuters Breakingviews columnist. The opinions...

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Quentin Webb HONG KONG, Aug 4 (Reuters Breakingviews) - The commodity business is often about blending different grades of coal, iron ore or crude oil. Yancoal Australia’s (YAL) $2.5 billion share sale is a more exotic alloy, mixing Australian public company procedure and Chinese state capitalism.

The Sydney-listed group is buying Rio Tinto’s (RIO) Coal & Allied unit for $2.7 billion. It saw off a counterbid from Switzerland's Glencore , then struck a truce that lets the trading giant into the deal. Now Yancoal - ultimately controlled by officials in the rustbelt province of Shandong - needs to find the money.

The solution, a $2.35 billion rights issue and $150 million placement, is unorthodox. The deal will massively dilute existing shares in the sub-$200 million small-cap; investors can buy nearly 24 shares for every existing security they own, at a near-68 percent discount to Monday’s closing price.

But the slim 4.6 percent discount to the “theoretical ex-rights price” gives investors little incentive to do so. It might not matter much. Yancoal has few institutional supporters, and is 78 percent owned by Yanzhou Coal Mining <600188.SS>, the Chinese-listed arm of a state-owned enterprise. Another 13 percent belongs to Noble Group . The embattled commodity trader reportedly opposes this deal.

So Yanzhou, which is sticking in $1 billion, found some unusual underwriter state-owned bad-debt manager Cinda <1359.HK>, Glencore, and Lucion, a Yanzhou associate. Using this trio rather than banks, who hate keeping big stakes, suggests Yanzhou expects limited take-up. That recalls SOE flotations in Hong Kong, where state backing makes up for a lack of genuine institutional demand.

Yancoal was the first Chinese SOE to list in Sydney, a “national interest” hoop Australia’s treasurer made it jump through to get a 2009 takeover approved. That requirement has been of questionable value, given a small free float and low liquidity.

The enlarged group will be a bigger player in coal, with a larger dollar value of tradeable stock, and a healthier balance sheet. Yet this looks like another victory of form over substance. A free float of somewhere between 2 and 22 percent, depending on investor appetite, will still be too small for index inclusion. This is a state-driven Chinese deal to which the veneer of a public company rights issue has been applied. Think of it as Shandong blended with Sydney.

On Twitter http//twitter.com/qtwebb

CONTEXT NEWS - Yancoal Australia, the Chinese-controlled miner, said on Aug. 1 it would sell $2.5 billion of shares to fund the $2.7 billion-plus purchase of Rio Tinto’s Coal & Allied subsidiary. The deal comes two months after it beat Glencore, the Swiss commodity trader, in a battle for the Australian unit.

- The company, which had a market value of just $166 million as of Aug. 3, plans to raise $2.35 billion in a renounceable rights issue at $0.10 a share. That is a 67.9 percent discount to the last closing price, and 4.6 percent below the stock’s “theoretical ex-rights price”.

- Yancoal’s majority shareholder is Yanzhou Coal Mining, which has listings in Hong Kong and Shanghai. Yanzhou will take up $1 billion of the rights. China Cinda Asset Management, a state-owned entity created as a "bad bank" in 1999, and Shandong Lucion Investment Holdings will underwrite $750 million and $250 million respectively. Glencore will underwrite $300 million. Yancoal will also sell a $150 million placement to two other entities, Shandong Taizhong Energy and General Nice Development.

- On July 27, Glencore and Yancoal struck a compromise deal that will give the former 49 percent of Coal & Allied’s Hunter Valley Operations. Glencore will buy stakes from both Yancoal and HVO's part-owner Mitsubishi.

- Yanzhou is also converting $1.8 billion of hybrid debt instruments, known as "subordinated capital notes", into new Yancoal shares. That, plus a $429 million cash payment from Glencore, will help cut Yancoal's leverage. Net debt will fall sharply to 3.1 times EBITDA, from 12.2 times.

- For previous columns by the author, Reuters customers can click on [WEBB/]

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Rio Tinto right to take China’s $2.7 bln and run	 

Glencore misreads Chinese tea leaves in bid battle

Glencore looks well-placed to snatch Rio coal unit

Chinese make bold coal bet on Rio Tinto leftovers

Yancoal presentation http://news.iguana2.com/yancoal/ASX/YAL/1027075 Yancoal statement http://news.iguana2.com/yancoal/ASX/YAL/1027072

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