UPDATE 2-Yanzhou plan to take Australia unit private faces scrutiny

Tue Jul 9, 2013 4:58am EDT

* Deal appears to run counter to FIRB requirements

* Yanzhou required to own under 70 pct of Yancoal by end 2013

* Yanzhou to argue deal is in Australia's national interest

* Many Australian coal assets on the block

* China investments in Australia may come under more scrutiny

By Jackie Range

SYDNEY, July 9 (Reuters) - China's Yanzhou Coal Mining Company Ltd has proposed taking its Australian unit private for around $180 million, a deal that would give it more control over a key coal asset but which is expected to face stiff opposition from regulators.

The proposal for Yanzhou to buy the 22 percent of Yancoal Australia Ltd it does not own appears to run counter to previous requirements it be run as an Australian company. It also comes at a time when sensitivity over Chinese firms buying foreign assets is high.

Yanzhou, China's third biggest coal firm by market value, is now talking with the Australia's Foreign Investment Review Board and is making the case that the deal is in Australia's national interest as many resource assets are now on the block, said a source close to the proposed deal.

"The market has fundamentally changed over the course of the last four to six months and if you look around Australia today there's an innumerable number of assets for sale," the source said, declining to be identified as the talks are confidential.

"In that kind of environment you want to be encouraging investment in this sector as much as you can, and if someone's putting up their hand to privatise an asset that they say they are committed to developing and maximizing employment, in this environment, I think that is compelling."

The FIRB approved Yanzhou's $3.5 billion bid for Australian coal miner Felix Resources Ltd in 2009 with strict conditions, including that it operate its Australian mines through an Australian company, list the unit by the end of 2012 and reduce its ownership to less than 70 percent by the end of this year.

Given the u-turns that the FIRB would have to make in order to approve the deal, some analysts doubt that it will proceed and that scepticism was reflected in its share price.

Shares in Yancoal closed 4.3 percent higher at A$0.73 but were far off Yanzhou's proposed purchase price of A$0.91 - a price that values Yancoal at A$905 million ($825 million). Hit by a slide in coal prices, Yancoal's stock has lost around half its value since its listing in June 2012.

"We would be surprised if the FIRB was this forgiving and therefore if the market recognised that this deal may actually happen," said Tom Sartor, an analyst with RBS Morgans in Brisbane.

The FIRB didn't immediately respond to requests for comment. A Yanzhou spokeswoman declined to comment.

China has stepped up its investments in Australia as it has elsewhere. Chinese investors last year bought Australia's biggest cotton farm Cubbie Station and Shanghai Zhongfu Group has approval to invest around A$700 million in a sugar farm project in northwest Australia.

Australia could significantly tighten scrutiny of foreign investment in farmlands, amid concerns of growing interest from China, if conservative opposition parties win September elections as expected.

Chinese telecoms equipment firm Huawei Technologies Co Ltd has also been barred from a $38 billion project in Australia due to cyber security concerns.

But law firm Clayton Utz estimates that completed Chinese investments in Australian energy and resources probably add up to "considerably less" than 10 percent of the total value of such projects. Yanzhou's $3.5 billion purchase of Felix represents the China's biggest coal investment in Australia to date.

For Yanzhou, potentially gaining complete control of Yancoal at a time when coal prices have weakened considerably is an opportunity too good not to have a stab at.

"They probably have a good feel of where coal demand is going, especially being based in the world's largest consumer of coal and they probably think they are picking up additional coal supply at a very cheap price," said Andrew Harrington, an analyst with Patersons Securities in Sydney.

There are a number of Australian coal assets on the block - some of which are seen by bankers and analysts as deals that will be tough to complete amid falling coal prices.

"It's pretty tough getting coal assets away at a half reasonable price at the moment. It's a buyer's market not a seller's market and there aren't that many buyers around with money," said Paul McTaggart, an analyst at Credit Suisse.

Resources giant BHP Billiton is looking to offload the Gregory Crinum coal operation in Queensland, which it jointly owns with Japan's Mitsubishi Corp. Global miner Rio Tinto is also looking to sell its Clermont coal mine and a 29 per cent stake in its Coal & Allied business.

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