BHP coal deal shines light on climate tech divide - Reuters

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Piotr Dytko, 42, a miner who has has worked for 24 years in mines, looks on as he works about 500 meters underground at the Boleslaw Smialy coal mine, a unit of coal miner Kompania Weglowa (KW) in Laziska Gorne, Silesia, southern Poland September 11, 2015. Coal mining has taken centre stage in the campaign for this month's parliamentary election in Poland, an outsize political role that threatens the country's hard-won economic growth and reputation in Europe. Picture taken September 11, 2015. REUTERS/Kacper Pempel TPX IMAGES OF THE DAY - GF10000227376

MELBOURNE, Nov 8 (Reuters Breakingviews) - It almost requires specialist mining equipment to get to the bottom of BHP’s (BHP.AX), (BHPB.L) latest deal. It agreed on Monday to sell a coking coal business for $1.35 billion, but a rapid increase in the steelmaking ingredient’s price makes it hard to ascertain its underlying worth. What’s more, Stanmore Resources’ (SMR.AX) comparatively small size and the aversion of banks to the fossil fuel means it’s having to jump through some financing hoops. At its essence, though, the deal is a bold bet against climate technology.

The acquisition would be even riskier if thermal coal were changing hands. That’s used for power generation and is solidly in the crosshairs of attendees at the United Nations climate summit read more in Glasgow. Coking, or metallurgical, coal, on the other hand, has come under less pressure in the fight to limit global warming as there are no working replacements for it.

Green hydrogen proponents, not least Australian billionaire Andrew “Twiggy” Forrest, are working hard to change that. He has Fortescue Metals (FMG.AX), the miner he chairs, investing heavily in the renewable energy source, including an agreement last week with Papua New Guinea to investigate producing 2.3 million tonnes a year.

That will take years, however. Even so, not all coking coal is created equal. BHP boss Mike Henry is keeping the better-quality stuff, while selling only the lower-grade rock to Stanmore.

Assessing the risk isn’t easy. Lower-quality coking coal has almost tripled in value since May, according to energy research outfit Argus, clouding Stanmore’s purchase price in smog. The enterprise it’s buying is either worth just shy of 7 times EBITDA for the 12 months to Sept. 30, or 2.2 times the annualised EBITDA of the final quarter of that period.

And funding was hardly a doddle. No banks are involved, leaving Stanmore to lean on hedge funds and private equity firms – Varde Partners, Canyon Capital and Farallon Capital – to lend it $625 million. And Stanmore’s 75% owner, Singapore-based Golden Energy and Resources (GOLD.SI), will stump up at least 50% of the equity to pay for the rest and guarantee almost half the overall price tag. There’s precious little room for error to drive Stanmore’s deal into the pits.

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CONTEXT NEWS

- BHP said on Nov. 9 that it had struck a deal to sell its 80% stake in BHP Mitusi Coal, or BMC, to Stanmore Resources for up to $1.35 billion in cash. The terms include an earn-out of up to $150 million payable in 2024, depending on performance.

- BMC operates two metallurgical coal mines in the Australian state of Queensland. Mitsui owns the other 20%.

- Stanmore is borrowing $625 million from a consortium of lenders run by Varde Partners, Canyon Capital Advisors and Farallon Capital Asia. The company also intends to finance at least $600 million of the deal price with new equity. Singapore-listed thermal-coal miner Golden Energy and Resources, which owns just over 75% of Stanmore, has agreed to provide at least half the funds. It also has guaranteed to pay the purchase price and any break fee up to $600 million if Stanmore is unable to complete the deal.

- Golden Energy is 88%-owned by Indonesia’s PT Dian Swastatika Sentosa.

Editing by Jeffrey Goldfarb and Katrina Hamlin

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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