Glencore's proposed sale of its 13 mt/y Rolleston thermal coal mine has cast doubt over the viability of the Wiggins Island Coal Export Terminal (WICET) in Queensland, where the company is the major equity holder and currently the dominant shipper.
On the face of it, Glencore's announcement on 28 August flagging the sale said the move is about capital allocation to projects that offer location synergies- something not available at Rolleston.
Not untrue given Glencore would likely allocate and redeploy capital generated from a Rolleston sale into its expanding Hunter Valley footprint as it attempts to move its thermal coal business away from the low cv Chinese and South East Asian markets, and more heavily into the largely stable Japanese market.
However, multiple industry sources view it as part of an even greater strategy whereby Glencore can either:
- force a restructuring deal with WICET lenders by potentially disbanding the terminal socialisation structure and stripping financing costs from terminal handling charges or
- get rid of its WICET exposure through a sale process.
“They have gone very long into the Hunter Valley and it’s about capital allocation, or where the best money is going to be spent,” said a banking source adding from a capital competition point of view, Rolleston becomes marginal for Glencore.
“Then there’s the negotiations going on with lenders on WICET, if you want to create some tension in that relationship, there’s very little other way Glencore can create that tension,” said the source.
Glencore on Monday flagged the sale of its Rolleston mine in Queensland with company officials saying the decision to sell Rolleston is similar to its sale of the Tahmoor coking coal mine in New South Wales, in that it is a divestment of an asset that has minimal operational synergies with other mines. The Rolleston mine produces a 5,470 kc NAR export product, which is a mainly sold into China and South Korea, as well as a 5,100 kc NAR domestic use product.
It is understood that Glencore's entitlements and take-or-pay obligations at the Wiggins Island Coal Export terminal will be a part of the sales process.
WICET, which has a nameplate throughput capacity of 27 mt/y, has been beset by poor utilization as three of its foundation shippers have gone under. Bandanna Energy and Cockatoo Coal were the first two to fall, and by the time Chinese owned Caledon Coal entered administration in late May, around 11 mt of the 27 mt in capacity entitlement had been defaulted on.
Over the last year, the terminal has recorded an average weekly throughput of around 0.19 mt against a capacity of 0.52 mt.
WICET was financed through a combination of preference equity, subordinate and senior debt with the US dollar facilities comprising around US$2.90bn, and the Australian dollar facility at $1.15bn. The senior debt was arranged by ANZ and included a syndicate of 19 Australian and international banks.
The subordinated debt is understood to have been provided by 13 investors including Australian fund managers and Stage 1 shippers of WICET whilst the preference equity was entirely financed by the latter. This includes Glencore, Wesfarmers, New Hope, Yancoal and Aquila, among others.
The borrowing is understood to be worth around A$4.32bn as of end of last fiscal year 30 June 2016. This borrowing cost along with a socialisation model, when a shipper has gone under, has meant shipping costs from WICET are believed to be between $22-$24/t compared with around $5/t at the nearby RG Tanna coal terminal.
Last year, RG Tanna's annualised throughput was 58 mt against a nameplate capacity of 68 mt/y.
As previously reported in IHS Markit MCRs sister publication, Australian Coal Report, restructuring negotiations between foundation shippers in WICET and lenders have been fraught and though the refinancing of WICET’s debt is not due until September 2018, the prospect of a Rolleston sale may force lenders’ hands.
Sources said as the foundation shipper, holding most of the WICET allocation of around 10.8 mt/y and much of the balance sheet might, Glencore, unlike other shippers, definitely would not default. But it could certainly strong-arm the banks into a deal as lenders have no say in deciding the ultimate asset buyer, a situation sources suggest could become an “Achilles Heel.”
“Glencore could say: ‘if you want our balance sheet strength to justify the lending and you are not going to move with the terms of lending, then you better talk to someone else. We’re out of here.’ And that would be an interesting thing for the bank to contemplate, in dealing with another company that may or may not satisfy the credit criteria as Glencore,” said a restructuring expert.
Sources also raise the spectre of an ominous scenario that might spook the lenders, in that should a future owner of Rolleston seek to extinguish the take-or-pay contracts and rebase costs, they could choose to push the mine into voluntary administration (VA), leaving WICET a stranded asset. While such an outcome is fairly unlikely, it remains within the bounds of possibility, sources said.
“That process of voluntary administration appears to be more and more strategy than as a result of a stress. It’s feasible that someone says ‘we buy this thing and do a VA and do a carefully thought out Deed of Company Arrangement and once you go into VA your commitment to WICET dissolves,” said the restructuring expert.
However, others say given Glencore’s WICET obligations are guaranteed by Xstrata Coal Queensland, which also include Glencore’s other Queensland coal assets, any sale process might have to be done on similar terms.
From Glencore’s perspective, industry sources see the sale process as being driven by a need to de-risk WICET.
“It’s pretty opportunistic, they have a good sized mine with a long life and a good pricing point and they have WICET which needs somebody else to take some exposure in it to take some of the pain away for Glencore,” said an industry source.
A successful restructure is more likely if all of WICET throughput was committed or if more shippers used the terminal.
“As far as balance sheet risk goes, Glencore have 10.8 mt of the 16 mt or 75% of the risk of that port at very high prices of take or pay. It makes sense to divest or monetise, even if it’s not a high value transaction, if you derisk WICET,” said the third source.
While three WICET shippers – Bandanna, Cockatoo and Caledon – have gone under, Glencore is unlikely to get out unscathed with the investments in WICET made during the euphoria of the coal boom. For one it’ll have to heavily discount any bids for the asset itself, given the take or pay.
“Once you are shipping at $22/t (port costs), it’s $250m per year on a 10 year rolling contract for not a very high value product that’s going out of it. So they won’t get much for it,” said the industry source.
That said, Rolleston itself is seen as a reasonably successful operation, with thick coal seams, a low strip ratio and cash costs understood to be in mid $40/t.
“Even with $22/t shipping charges, it probably makes money in today’s price. But it’s fickle and can change if prices drop,” said the source. Australian high-ash 5,500 NAR has traded at around $72/t FOB in recent weeks.
But it’s hard to gauge who would be interested in buying the asset. Specifically on the Rolleston sale, analyst sources who spoke with IHS Markit say they can't see a natural economic contender for it in Australia. Though some suggest US infrastructure funds that are interested in port assets would want to underpin their hold over logistics with a long life producing mine.
Eric Thorpe is a Senior Research Analyst at IHS Markit.
Posted 19 September 2017