Yanzhou Coal Talks With Felix Resources Said to Stall on Price

By Cathy Chan

March 11 (Bloomberg) -- Yanzhou Coal Mining Co.’s talks to take over Felix Resources Ltd., whose stock gained 9 percent last year, have stalled after price disagreements, two people with knowledge of the matter said.

Shareholders of Brisbane-based Felix Resources, which supplies coal to Korea and Japan, have sought at least A$2.9 billion ($1.9 billion), one of the people said, declining to be identified because discussions are private. Yanzhou Coal, China’s fourth biggest producer, may be willing to pay as much as A$2.35 billion, the other person said. No formal offer has been made, the people said.

Talks began late last year and the two companies have been unable to agree on terms as Felix investors want at least twice as much as the current market price of A$7 a share, said the people. Chinese companies have become more prudent in making overseas acquisitions after losing billions in the U.S., Europe and Africa since the global financial crisis began in 2007.

“While China is encouraging its companies to spend more on commodities and energy assets overseas, these acquisitions are still highly regulated because on concerns of improper use of their cash,” said Huo Teh-ming, professor of China Center for Economic Research at Peking University.

Zhang Baocai, a spokesman at Shandong-based Yanzhou Coal, didn’t reply to calls made to his office. Felix Managing Director Brian Flannery is out of Australia and unable to comment, his personal assistant said. Peter Brookes, a spokesman for Felix, declined to immediately comment.

Price Gaps

Felix surged 37 percent to A$7.43 on Dec. 5, the biggest gain since February 1989, after the Australian Financial Review reported Yanzhou was in talks to buy the company for more than A$3 billion. Since then, Felix has slipped 11 percent. Yanzhou gained 5.4 percent yesterday in Hong Kong, paring the stock’s drop this year to 20 percent.

Yanzhou may be willing to offer only A$10 to A$12 per share, valuing Felix at up to A$2.35 billion, one of the people said. Felix may want at least A$15 per share, said the other person.

China’s investment in resource producers totaled $22 billion last month, including Aluminum Corp. of China’s stake in Rio Tinto Group, as prices of commodities including coal and oil fell from July’s records. Yanzhou acquired its only overseas asset, Australia’s Austar energy coal mine, in 2005.

China, the world’s largest coal producer and user, uses the fuel to generate almost 80 percent of its electricity. As part of the government’s $585 billion economic stimulus plan announced in November, China accelerated approvals for the construction of power plants, underpinning growth in coal demand.

Managers Meet

Senior management of both companies met in the third week of February in Hong Kong and made little progress, the people said, asking not to be identified because the meeting was private. No date has been set for further talks, one of the people said.

Flannery said March 6 that Felix in February shelved talks to sell itself to an unidentified company. Felix “decided to move on,” he said in an interview at the time.

Felix had said in a Feb. 27 statement that the talks with the unidentified company were unlikely to be concluded in the “near term” because of the global financial crisis.

The company’s major shareholders include Flannery, 57, and Chairman Travers Duncan, each owning 15 percent. Hans Mende is a director who controls American Metals and Coal International Inc., which owns 19 percent of Felix. David Knappick, former chief financial officer, owns 7.4 percent of Felix, according to Felix’s 2008 annual report.

American Metals and Coal International Inc., a closely held mining investment company, bought a 19.2 percent stake in Felix for A$188 million on March 21, 2007. Felix sells part of its coal through AMCI.

Felix Resources is also studying acquisitions of energy coal assets in India and Indonesia, Flannery said in the interview last week. The Australian coal producer said last month first-half profit more than tripled to A$166 million as contract prices for thermal and coking coal rose to a record in 2008 on rising demand from utilities and steel mills in Asia.

To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net.