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Capital Markets Weekly: Planned Australian coal terminal facility IPO to seek AUD1 billion

05 November 2020 Brian Lawson

Canadian infrastructure firm Brookfield is looking to sell 60-80% of its lease holding in Dalrymple Bay Infrastructure, a major coal terminal facility in Queensland, Australia, reportedly seeking proceeds in excess of AUD1 billion (USD710 million).

Dalrymple Bay

The terminal is a major coal loading facility.

It is owned by the Queensland Government and leased to DBCT Management under a 99-year lease arrangement comprising a -year lease from 2001 and a 49-year extension option. The lease has been owned by Brookfield since 2009.

A key feature of the facility is that 80% of its exports - 62 million tons in 2019 - are metallurgical coal, used in steel production by mills in Japan, South Korea, Taiwan, India and China. Sourcing material from the Bowen Basin, DBCT supplies 21% of metallurgical coal exports globally, and some 7% of total global seaborn coal traffic. Unlike coal supply for power generation, there is no immediate alternative to the use of coal in steel manufacture. However, its remaining business comes from thermal coal (used in power generation).

Queensland held state elections on 31 October, with Premier Annastacia Palaszczuk (Labor Party) re-elected for a third term. She has openly backed the resource industry. In September, the Palaszczuk government approved a new metallurgical coal mine in the Bowen Basin.

In March 2020, a planned share sale by the firm worth up to AUD 2 billion was postponed given market uncertainties during the global spread of the COVID-19 pandemic. At the time media - notably IPE Real Assets website - suggested that Korea's National Pension Service, working with Global Infrastructure Partners and CK Infrastructure from Hong Kong had been interested in investing in the asset through a trade sale but had been discouraged by logistical problems with due diligence during the pandemic.

Pre-marketed started: Deal represents sizeable test

Pre-marketing for the deal started on 19 October, to test initial investor response and seek potential core subscribers. At this stage the marketing process is to explain the port and discuss its future business and regulatory prospects, with the goal of attracting "cornerstone" strategic investors, potentially for up to half the planned deal according to media reports. Filing of a prospectus for the issue and its subsequent sale will be subject to the results of this initial phase.

Pricing for the deal is reported to be significantly lower than earlier this year but is still expected to seek over AUD 1 billion.

By Australian standards, this is a sizeable objective. The last AUD1 billion plus IPO in the country was for Viva Energy in mid-2018, with Healthscope and Medibank Private achieving the threshold in 2014.

A further structural challenge is that the facility is subject to a Queensland Competition Authority regulatory regime subject to regular five-yearly reviews, leaving scope for regulatory uncertainty.

Adverse Australian coal sector share price trends

The most recent coal sector share sale - along with the wider sector - has shown clearly-adverse price performance recently. This is likely to reflect global economic slowdown and China reportedly issuing an unofficial ban on state-owned energy firms and steel mills to cease importing of Australian coal, as well as increased investor caution towards carbon-intensive assets, particularly those in coal.

In October 2018, Coronado Global Resources raised AUD773 million - less than half its initial target - on the Australian Stock Exchange with the sale of shares at AUD4 each. These opened with first-day losses of 8.5 percent and have fallen consistently thereafter. The shares are now trading just AUD0.74 per share, implying an 80% loss of value since the IPO. Australian sector leader Yancoal has lost 80% of its stock market value since 2017, while second-ranked firm Whitehaven is trading at just 18% of its peak 2018 value.

Our take

Dalrymple Bay is involved in port logistics rather than coal production but as the first coal-related share sale in Australia since late 2018, it represents an important indicator of current stock market demand for coal-related assets.

In its favor will be a potentially lower valuation than in early 2020, a high dividend yield, and heavy presence of metallurgical coal within its overall business activity.

Conversely, the adverse recent share price performance of the Australian coal sector is an obvious negative factor, with prior investments in Coronado Global Resources and elsewhere in the sector having suffered heavy share price losses in the last two years.

If the deal does achieve completion, it will be of considerable interest to see which investors participate, and whether they do so as trade or strategic buyers rather from a conventional portfolio perspective.

Key indicators

Risk adverse

On 29 October, ANZ announced it would cease immediately in funding new coal projects and announced plans to stop new coal-related lending from 2030. CBA and Westpac previously set the same target date, while the last of Australia's big four banks NAB will stop new coal-related lending by 2035. Such pledges indicate that Australian coal-related projects will be less able to obtain funding from major domestic banks.

If the Chinese government issues an official ban on imports of Australian coal for political reasons this would increase near-term pressure on sector share-price performance, as would a renewed economic slowdown in the region due to the COVID-19 pandemic. Mitigating this, China is heavily reliant on Australian supplies of metallurgical coal and iron ore, making a lengthy trade conflict significantly less likely.

South Korea and Japan are targeting net zero carbon emissions by 2050, with China setting a similar target for 2060, indicating the likelihood of an eventual decline in their demand for coal imports. Banks in Japan and South Korea also are facing pressure from lobbying groups to reduce or stop their support for international coal projects. Withdrawal of the planned share deal would reinforce the perception of significant and growing difficulty in funding coal-related deals.

Risk positive

Successful completion of the planned issue with institutional investors attracted by a high projected dividend yield (of around 5.5%) - and subsequent price appreciation - would buck the very clear adverse recent trends in the price of coal-sector shares.

Japanese and Chinese lenders stepping into replace domestic Australian banks would assist major Australian coal firms in preserving access to external finance: this was already seen in the renewal of Whitehaven's loan facility in Match: over half the AUD1 billion facility now comes from Chinese and Japanese lenders, versus 20% six years ago.

Provision of external capital from other sources, including foreign owners and private equity funds, and expanded lending by official bodies such as China and Japan's export-import banks would also indicate continued scope to fund coal development projects. Funding by parent groups is also potentially important, previously indicated by India's Adani Enterprises decision to fund its AUD 2 billion Carmichael coal mine facility in Australia from internal group resources. Reduced demand from countries setting lower carbon emission goals is likely to be offset by rising demand, particularly from India, but also from Vietnam during the next decade.

Curtailed global investment in coal would indicate improved business prospects - with reduced competition - for those facilities which are developed.

Posted 05 November 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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