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South32 abandons deal to buy Peabody coal mine in Australia

Australian producer decided not to make required concessions.

South32 is ditching its first major deal since spinning off from BHP Billiton in 2015.

The Perth-based company said on Tuesday it’s walking away from Peabody Energy Corporation’s Metropolitan Colliery coal mine and its minority stake in the Port Kembla coal export terminal, both in Australia. It had agreed to pay at least $200 million for the assets last year, but Australian regulators raised concerns the sale would weaken competition among coal suppliers to domestic steelmakers. South32 said it wasn’t willing to make concessions necessary to get the sale cleared.  

The failure of the deal “is unfortunate” for South32 “considering the obvious synergies with its existing Illawarra operations”  Paul Hissey, an RBC Capital Markets analyst, wrote in a research note. The proposed acquisition was a “pro-growth catalyst for South32.”

The failed deal comes as prices for the coal used in steel making are surging amid weather-related disruptions in Australia. It also comes just two weeks after St. Louis-based Peabody emerged from bankruptcy and re-listed on the New York Stock Exchange.

South32 shares lost 1.1% to A$2.80 at 12:52 p.m. in Sydney. The benchmark S&P/ASX 200 Index also dropped 1.1%.

‘Compromising’ Concessions

“To proceed with the acquisition, in light of the anticipated concessions, would have compromised the merits of the transaction and this is not something we are prepared to do,” South32 chief executive officer Graham Kerr said in the statement.

Peabody said it will keep the mine and the terminal stake, along with a deposit negotiated as part of the transaction. Operations won’t be affected and the mine should be fully resuming shipments at the end of May, the company said in a separate statement.

“We are surprised that South32” and Australian regulators “reached an impasse, given both the physical synergies and the global nature of the metallurgical coal markets,” Peabody chief executive officer Glenn Kellow said in the statement. “On the other hand, we see continuing opportunities given Metropolitan’s quality coking coals and port location.”

Peabody said it will continue to focus on shrinking debt and returning cash to shareholders.

© 2017 Bloomberg

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