Australia's Wesfarmers quits coal with $635 million mine sale

MELBOURNE (Reuters) - Australia’s Wesfarmers Ltd has agreed to sell its last coal asset for A$860 million ($635 million), taking advantage of a surge in coal prices, as the conglomerate embarks on the biggest overhaul of its portfolio in a decade.

The sale of its 40 percent stake in the Bengalla thermal coal mine to New Hope Corp at a big profit follows Wesfarmers’ sale of its Curragh mine last December, and a less glorious exit from a disastrous foray into British hardware.

Investors expect Wesfarmers will use the proceeds to pay down debt, positioning for its next acquisition.

“You’d argue it’s probably destined to be a domestic business only, after the UK failure. It’ll be interesting to see what they do next,” said Jason Beddow, Managing Director of Argo Investments, Wesfarmers’ eighth-largest shareholder.

The conglomerate is now getting set to spin off its biggest business, Australia’s no.2 supermarket chain Coles, estimated to be worth about A$16 billion.

The Bengalla sale to New Hope came as no surprise, as the Australian miner, one of only a handful still expanding in thermal coal amid concerns over global warming, already owns 40 percent of the mine and had flagged it wanted more.

New Hope agreed to pay virtually the same price for the stake from Wesfarmers as it paid in 2016, even though coal prices are more than double what they were when it bought global miner Rio Tinto’s stake in the mine.

“It’s a fair price because these assets are priced on long term coal forecasts,” New Hope Managing Director Shane Stephan told Reuters.

New Hope’s shares jumped as much as 10 percent to their highest level in 4-1/2 years in a weaker broader market. Wesfarmers shares inched up 0.5 percent.

Bengalla, which is expected to continue producing for more than 20 years, made up more than half of New Hope’s profit last year.

The company has no further acquisitions on the radar, focusing now on securing approvals to extend the life of its Acland mine in Queensland and a final investment decision on a small new mine, Stephan said.

Debt-free New Hope expects to pay for the Bengalla stake from cash and a new bank credit facility.

Wesfarmers, which reports annual results on Aug. 15, expects to book a pre-tax profit in the range of A$670 million to A$680 million on the sale.

The other partners in Bengalla, Taiwan’s Taipower and Japan’s Mitsui , with 10 percent each, have pre-emptive rights to match New Hope’s offer, but didn’t exercise those rights when coal prices were much lower.

($1 = 1.3541 Australian dollars)

Reporting by Sonali Paul; Additional reporting by Rushil Dutta in Bengaluru; Editing by Eric Meijer