China Shenhua Energy Co., the world's second-largest coal company, could raise almost $80 billion to spend on acquisitions of mines, power plants and ports to feed the nation's growing demand for energy.
The mining company is in preliminary talks to invest in Indonesia and is studying targets in Australia and Mongolia, President Ling Wen said Nov. 30. The $134 billion unsolicited takeover offer for Rio Tinto Group by BHP Billiton Ltd., the world's biggest mining company, may accelerate those plans.
``It's very important to use not only organic growth, but also mergers and acquisitions to make our enterprise larger, better and more profitable,'' Ling said in an interview in Beijing. ``We have huge room to make some acquisitions.''
China Shenhua would be able to finance takeovers because its parent, state-owned Shenhua Group Corp., owns a 74 percent stake. China Shenhua would be able to free up $78.5 billion by selling new shares and diluting its parent's stake to just over 50 percent, according to data compiled by Bloomberg. Neither the state nor the company have any current plan for selling stock, Ling said.
China, the largest energy consumer after the U.S., burns coal to generate almost 80 percent of its power. The government estimates energy demand will rise about 4 percent annually to the equivalent of 2.7 billion metric tons of coal by 2010. Gross domestic product grew 11.5 percent in the third quarter.
Indonesian Projects
China Shenhua, which ranks behind St. Louis-based Peabody Energy Corp. in coal sales, gained as much as 1.4 percent to HK$47.75 ($6.13) in Hong Kong and traded at HK$47.35 at 12:05 p.m. local time. The stock more than doubled this year, outpacing the 46 percent advance in the benchmark Hang Seng Index.
The parent's stake dropped from 81 percent after the company raised 66.6 billion yuan ($9 billion) in a Shanghai share sale in October. The stock has declined 8.8 percent since to 63.19 yuan.
The Beijing-based company is considering ``several'' projects in Indonesia including coal mining, electricity generation, railways and ports, Ling said, without naming potential targets. He declined to comment on a Nov. 26 report in the South China Morning Post that China Shenhua is considering a $4 billion bid for a controlling stake in PT Adaro Indonesia, the nation's second-largest coal producer.
``Shenhua wants to become a global company and in order to get there it has to acquire overseas assets,'' said Donovan Huang, a Hong Kong-based coal analyst at Nomura Securities Co. ``China is encouraging its coal companies to acquire overseas assets to enhance energy security.''
Beyond Coal
It is ``possible for us to consider some other kinds of mining than coal mining'' if the assets generate ``a good return,'' Ling said, without specifying minerals the company may add. The internal rate of return, a measure of a project's profitability, should be at least 10 percent, he said.
Ling said Shenhua is monitoring Sydney-based BHP's bid for London-based Rio Tinto. He declined to say whether Shenhua is planning a counteroffer. Shenhua's market value was equal to $163.5 billion on Nov. 30.
``We keep our eyes on the event but have no actions,'' Ling said. BHP's bid for Rio is ``a very good event in the mining sector globally and it will have a great influence not only on the mining industry but also on the Chinese economy.''
A five-year increase in metals prices has spurred about $185 billion of bids in the industry in the past year, according to data compiled by Bloomberg. A BHP takeover of Rio would trigger a new round of acquisitions and exert ``very heavy pressure'' on the management of Chinese mining companies, Ling said.
Record Prices
China, the world's biggest producer and consumer of coal, became a net importer for the first time in January, ending centuries of self-sufficiency. The benchmark price of coal at Australia's Newcastle Port rose 72 percent this year to a record $88.63 a metric ton for the week ended Nov. 23, according to the globalCOAL NEWC Index.
``In the long term, I think the coal price will keep this high level and still have room to increase further,'' Ling said. ``In the next five to 10 years there is no doubt the Chinese economy will keep this trend, with GDP growth of about 10 percent.''
