Shares of Chinese-backed Yancoal (ASX:YAL) plunged more than 35 percent on Wednesday (August 2) after the producer announced plans to raise $2.5 billion to pay for Rio Tinto’s (ASX:RIO, NYSE:RIO, LSE:RIO) coal mines in Australia.
Yancoal told shareholders that it would launch an entitlement offer to acquire Rio’s Coal & Allied business, that includes the Hunter Valley and Mount Thorley Warkworth Operations. The purchase will allow Yancoal to become Australia’s largest pure-play coal producer.
“The strategic acquisition of Coal & Allied will redefine our position within the global coal marketplace and strengthen Yancoal Australia for the future,” Yancoal Chairman Xiyong Li said in a statement.
The company launched the equity raising together with Yanzhou, that owns 78 percent of Yancoal, subscribing for $1 billion. Glencore (LSE:GLEN) has also committed for $300 million and a further $1 billion will be coming from two Chinese groups, Cinda Asset Management and Shandong Lucion Investment Holdings.
The remaining $150m will come from a mix of cash reserves, a share placement and existing credit facilities, Yancoal said.
Last month, Yancoal beat Glencore in a three-week bidding war to acquire Rio’s coal assets. After a fierce battle, Rio backed Yancoal’s deal, as it had fewer regulatory issues, despite its financing being less clear.
But last week, Glencore struck a $1.1 billion surprise deal with Yancoal to buy almost half the coal assets the ASX-listed company is acquiring from Rio. In addition, the companies will form a joint venture to manage the operations.
Yancoal expects to complete the Coal & Allied purchase during the third quarter of the year, which is subject to shareholder approval.
That said, the equity fundraising may be challenged by Noble Group, which holds 13.2 percent on Yancoal and has declined to participate in the rights issues, over concerns that the deal will dilute the holding of minority shareholders.
On Wednesday, Yancoal’s shares suffered their biggest fall since listing in June 2012, declining 35.90 percent to close at A$0.25.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.