Lending Association

Will BlueScope muscle in on South32’s deal?

The steelmaker is the major customer for the high-quality coking coal from the mine, and under its current contract, it has a first right of refusal should the mine be put up for sale.

South32 (ASX:S32) revealed on Thursday that it proposed selling the mine to Indonesian and Australian interests for around $US1.65 billion in cash and future payments.

BlueScope (ASX:BSL), considering its position after South32’s announcement, has an eight-year coal supply agreement with South32, entitling it to the first right to buy the two mines.

“BlueScope has ongoing rights under the long-term supply contract, including pre-emption acquisition rights in favour of BlueScope, and the company will consider its position,” the company told investors in a statement.

Under its contract, BlueScope can elect to buy the coal business at the negotiated $US1.65 billion price tag, while the Indonesia-backed buyer is not entitled to make a higher bid, South32 Chief Executive Graham Kerr said.

Under the agreement announced on Thursday, Golden Energy and Resources, an Indonesian group ultimately owned by the wealthy Widjaja family, and a local firm, M Resources, would jointly buy the mines. GEAR will own 70% of the mining operations, and M Resources, which is in partnership with GEAR in Stanmore Resources in Queensland (in the old TDM coal mines of BHP).

The Illawarra mine has been a volatile business with high profits in the wake of the Russian invasion of Ukraine, but also falls in revenue and earnings because of the time and cost involved in repositioning its longwall mining machines.

In the December half-year, moving the longwall cost South32 $US267 million in lower sales volumes, and that is a continuing problem, especially with mining conditions in the region known for their difficulty and high levels of gas.

At the end of December, BlueScope had more than $1.3 billion in cash on hand (and around $617 million after taking into account debt). It has a major $1 billion project to revamp its Number 6 blast furnace over the next five years to replace the current Number 5 furnace, which is nearing the end of its current campaign.

Taking on $A2.5 billion for the coal mines will lift the company’s gearing and debt levels, no matter how they structure it to balance cash on hand and debt and have enough leftover to finance the blast furnace reline without too much pressure.