Summary

The Treasurer has agreed to remove the foreign investment sell down conditions imposed on Yanzhou in connection with the merger of its subsidiary, Yancoal, with Gloucester in March 2012.

The Treasurer’s decision is welcome for a number of reasons, including:

• it recognises the reality that the concept of ‘what is in the national interest’ may change over time with changes in economic and industry conditions,
• the Treasurer has foreshadowed in his media release that he would be open to a 100% acquisition of Yancoal by Yanzhou, which confirms that Australia’s foreign investment policy is now more nuanced and does not prevent 100% acquisitions by state-owned enterprises where not contrary to Australia’s national interest,
• it reaffirms the message that Australia remains ‘open for business’.

The Decision

Yanzhou Coal Mining Company Limited (Yanzhou) has obtained the approval of the Treasurer of the Commonwealth of Australia to remove statutory conditions¹ that required Yanzhou to:

• reduce its economic ownership of Yancoal Australia Limited (Yancoal) from 78% to below 70% by 31 December 2013,
• reduce its interest in certain underlying assets of Yancoal acquired when Yancoal acquired Felix Resources in 2009 to no more than 50% by 31 December 2013, and
• reduce its ownership of Premier Coal Ltd, Syntech Holdings Pty Ltd and Syntech Holdings II Pty Ltd or their underlying assets from 100% to below 70% by 31 December 2014.

These statutory conditions were imposed in connection with the decision of the then Treasurer to allow the merger of Yancoal with Gloucester Coal Ltd in March 2012, and were in turn based on undertakings given to the then Assistant Treasurer in October 2009 when Yanzhou (through a subsidiary of Yancoal) acquired Felix Resources Ltd.

The Treasurer recognised in his media release² that since the statutory conditions were imposed in 2009, significant challenges have emerged for the Australian coal industry, including slowing demand, declining coal prices and a number of mine closures.

As part of the Treasurer’s approval, Yanzhou has agreed to ensure that Yancoal continues to operate so that it remains solvent, has agreed to extend its existing loans to Yancoal if required, and will support Yancoal’s plans to expand the Moolarben open cut mine.

From a foreign investment perspective, the Treasurer’s decision is welcome for a number of reasons, including:

• it recognises the reality that the concept of ‘what is in the national interest’ may change over time with changes in economic and industry conditions – the coal market today is significantly different from that market in 2009 when the Felix undertakings were given, and it appears sensible to recognise that the national interest may now be served by arrangements which facilitate the strengthening and expansion of a significant operating mining group, even where foreign owned³,
• the Treasurer has foreshadowed in his media release that he would be open to a 100% acquisition of Yancoal by Yanzhou, which confirms that Australia’s foreign investment policy is now more nuanced and does not prevent 100% acquisitions by state-owned enterprises where not contrary to Australia’s national interest,
• it reaffirms the message in light of recent media controversy regarding the ADM GrainCorp decision, that Australia remains ‘open for business’.

End Notes:

1. Imposed under s 25(1A) of the Foreign Acquisitions and Takeovers Act 1975.
2. The Treasurer’s media release can be found here.
3. Each of the conditions imposed in connection with the decision to allow the merger with Gloucester Coal in March 2012, and the undertakings given in October 2009 in connection with the acquisition of Felix Resources, expressly contemplated that Yanzhou could seek the Treasurer’s approval to vary these conditions if Yanzhou considered that economic conditions or other factors potentially mean they could not be met.

For further information, please contact:

Phillipa Stone, Partner, Herbert Smith Freehills
[email protected]

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