Funding for Anglo American’s $3.8bn (R70bn) deal to sell its steelmaking coal business to US mining house Peabody Energy has been put on hold after a March fire at a key asset in the transaction.
With the next three months critical, the setback throws a spanner in the works in Anglo’s restructuring plans, testing CEO Duncan Wanblad’s ability to salvage one of the most important deals aimed at boosting shareholder returns after fending off two buyout overtures from rival BHP last year.
Peabody’s executives said on an investor call on Tuesday that the incident at the Moranbah North coal mine in Australia has created huge uncertainty on the deal, with its conclusion now up in the air.
Mark Spurbeck, executive vice-president and CFO, said funding for the deal has been put on ice, casting further uncertainty on the deal and putting pressure on Anglo’s top brass to address issues at Moranbah North.
“We kicked off our marketing across 50 firms and had strong interest in underwriting the transaction,” Spurbeck said.
“Unfortunately, we were scheduled to kick off our meetings and discussions with these investors the same day the incident happened. It is clear now that with all the uncertainty around Moranbah North — which is the most significant piece of the transaction — investors like us are unwilling to underwrite that uncertainty. So, until further clarity is noted, our financing is on hold.”
Moranbah is the largest of the four Australian steelmaking coal mines that Anglo announced in November would be sold to US-based Peabody Energy as part of the group’s portfolio restructuring. Should Peabody walk away from the deal, this will cast doubt on the value of the business to potential suitors.
Output at Moranbah North — located in Queensland — was suspended after an underground fire broke out at the mine in March.
On notice
To this end, Peabody on Monday issued a material adverse change notice to Anglo, essentially putting the Anglo-SA mining major on notice that it may terminate the agreement, should issues it has identified at Moranbah North not be addressed.
Anglo has said the fire at the mine and the pause in production do not constitute a material adverse change — a rarely invoked clause in M&A deals that allows buyers to back out of a deal when significant events affect the target’s value or operations. Peabody’s stance sets up a head-on collision with Anglo.
Peabody CEO Jim Grech said Anglo has 10 days to formally respond to the material adverse change, and a further 90 days to cure issues raised in the notice, failure of which might lead to the termination of the agreement reached in November.
“We have deployed quite a few technical experts and consultants, plus our own internal team, who went through a very rigorous analysis of the situation and its potential impacts, and we see this to have the potential to be very significant. As we stand here today, there is no known timetable for resuming long wall production sustainably,” Grech said.
“It is not even known if the current long wall will ever run again. Our own experience from mining ignitions is that the timeline can be longer than anticipated ... they [Anglo] have a timeline that says when the ignition occurred to a long wall running sustainably might be three to four months. To us, that does not seem reasonable and is part of the data we used to do an analysis to issue the material adverse change.”
Anglo has made steady progress in implementing the “self-help” it announced last year, partly to fend off unsolicited bids from Australian mining behemoth BHP.
Anglo is looking to focus its portfolio on its copper, premium iron ore and crop nutrient assets — a strategic decision that made its platinum group metals, nickel, steelmaking coal and diamonds business not fit for purpose for the group’s growth blueprint.
The company is selling its nickel business for $500m while its shareholders last week voted to demerge Anglo American Platinum.
The mooted sale of the steelmaking coal business to Peabody was also a big leap forward in concluding the portfolio simplification exercise, with the group still struggling to dispose of De Beers.
Anglo in February wrote down the value of De Beers to about $4.1bn — the second writedown in less than three years.
The company aims to exit De Beers either via a trade sale or a listing, but finding a buyer has proved difficult as the diamond industry faces structural challenges.
The uncertainty around the Peabody transaction adds pressure on Wanblad to complete the group’s restructuring.
“We have moved at pace to separate each of the four business at the right time — and I am delighted to tell you that the lion’s share of this work is almost complete ... we remain on track to be substantively complete with the portfolio transformation by the end of this year,” Wanblad told shareholders last week.
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