Glencore is selling its coal haulage business in Australia’s Hunter Valley for A$1.14bn ($874m) to US railroad company Genesee & Wyoming as part of efforts to reduce its debt burden.
With the sale of Glencore Rail, the Swiss group will be on the verge of meeting chief executive Ivan Glasenberg’s target of US$5bn in assets sales in 2016.
The mining and commodity trader said on Thursday that upon completion of the deal, which is subject to approval by Australia’s foreign investment regulator, Genesee & Wyoming Australia would service most of Glencore’s coal haulage needs in the Hunter Valley via a 20-year contract.
Glencore has already agreed $3.9bn of asset sales this year, including the sale of a 49 per cent stake in its agricultural arm. Shares in Glencore have risen more than 160 per cent this year as commodity prices have rallied and the company has made progress with its debt reduction plan.
At 11 times underlying earnings, the price was “good”, said Paul Gait, analyst at Bernstein Research, noting that the deal also secures Glencore’s rail access for 20 years. “This is not another asset disposal at the bottom of the cycle,” he said.
GWA beat out competition from Australia’s Aurizon and Pacific National, both of which already run large coal haulage businesses in the Hunter Valley, one of the country’s biggest coal-producing regions.
Its entry into the Hunter Valley adds a new competitor in the coal haulage market as Glencore previously did not ship other companies’ coal via its Grail business.
Peter Freyberg, head of Glencore’s coal assets, said the company looked forward to a constructive working relationship with GWA.
“We established Grail in 2010 and have steadily grown it to become the third-largest coal haulage business in the country,” said Mr Freyberg. “It has played a very important role in reducing costs and improving the overall efficiency of Australia’s largest coal chain in the Hunter Valley.”
Glencore said in March that it was aiming for up to $5bn in asset disposals this year as part of its debt reduction plan, launched last year in response to a slump in its share price linked to collapse in commodities prices.
The sale of Grail, Glencore’s agricultural business, and silver and gold output brings the total to US$4.7bn.
Glencore is aiming to reduce net debt to $16.5bn-$17.5bn by the end of the year. As of end-June, net debt stood at $23.6bn.
Grail currently hauls about 40m tonnes per year of coal production from Glencore's mines in the Hunter Valley to the Port of Newcastle.
The sale comes as Australian thermal coal — marker for the vast Asian market — trades above $100 a tonne for the first since 2012. The commodity, which is used to generate electricity in power stations, has doubled in value this year after China placed curbs on its domestic coal miners.
But Glencore, the world’s biggest producer of seaborne thermal coal, has only partially benefited from the price surge. This is because it hedged 55m tonnes of output at much lower prices.
The company reported a $395m mark-to-market non-cash loss in the first half of the year on the hedges. Since then coal prices have kept climbing, meaning that Glencore has given up even more potential profit on its coal output.
“The hedge in itself is just a loss of upside, and Glencore importantly still has 40m tonnes of unhedged thermal coal production, as well as 8m tonnes of coking and and semi soft production that is benefitting even more from price increases,” said analysts at Liberum in report published this week.
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