Glencore will pay US$1.13 billion in cash plus a 27.9% share of $240 million non-contingent royalties over five years and 49% of price contingent royalties payable by Yancoal to Rio Tinto on production from HVO.
It will acquire a 16.6% interest in HVO directly from Yancoal and the companies will work together to acquire Mitsubishi Development’s 32.4% interest in HVO to achieve Glencore’s 49% stake.
The deal ensures Glencore will expand its footprint in the Hunter Valley despite being outbid for Rio Tinto’s Coal & Allied business by the Chinese backed Yancoal, which paid US$2.65 billion for the assets.
The proposed joint venture should also allow greater sharing of infrastructure and coal processing in the Hunter Valley between the two coal mining giants.
Glencore will be entitled to its share of the profits of HVO from the date Yancoal completes its C&A acquisition.
Glencore has also agreed to subscribe for US$300 million worth of shares in Yancoal’s equity raising.
The transaction will be funded from Glencore’s existing cash resources and Glencore expects the transaction to close within six months.
The HVO JV will be jointly controlled by Glencore and Yancoal through a joint venture management committee comprising three representatives from both companies.
An independent management team will run the operations on a day-to-day basis and report to the committee.
In order to deliver maximum operational synergies, Glencore will nominate the candidates for HVO general manager while Yancoal will nominate the candidates for HVO financial controller.
Glencore will provide operational and support services to the HVO JV.
The commodity trader will also be the exclusive marketing agent for HVO coal sales into Japan, South Korea and all other countries excluding China, Taiwan (with certain exclusions), Thailand and Malaysia.
Glencore said HVO was a large-scale, long-life and low-cost coal mine producing premium quality export thermal coal and semi-soft coking coal.
“HVO lies adjacent to a number of existing Glencore mines in the Hunter Valley,” the company said.
“The addition of 49% of HVO to our existing portfolio in the Hunter Valley will unlock mining and operating synergies.
“Glencore’s combined portfolio of mines in the Hunter Valley, including HVO, will have production capacity of 69 million tonnes per annum of high quality energy coal to meet increasing Asian demand.”
For the six months to June 2017, Rio Tinto reported its 68% share of HVO produced 4.3Mt of thermal coal and 733,000t of semi soft coking coal.
Yancoal chairman Xiyong Li said the joint venture arrangement provided significant combined synergies and commercial opportunities for both Yancoal and Glencore, with “shareholders set to benefit from two of Australia’s leading coal producers working together”.
Yancoal CEO Reinhold Schmidt said: “Together, we are maximising the synergies and operational experience of both companies to drive new market growth, while demonstrating a shared commitment to continued investment within the local resources sector”.