Wesfarmers Ltd to divest last coal asset in $1 billion deal with New Hope Corporation Limited

Wesfarmers Ltd (ASX: WES) may soon divest its last remaining coal asset. According to the Australian Financial Review, analysts at Macquarie Group Ltd (ASX: MQG) expect the conglomerate to sell its 40% stake in the Bengalla coal project to New Hope Corporation Limited (ASX: NHC) for over $1 billion.

Wesfarmers’s resources portfolio was the subject of a strategic review that led to the sale of the Curragh coal mine to Coronado Coal Group for $700 million in December 2017. In Macquarie’s view, the fact that Wesfarmers recently reported results excluding its resources business is a sign that the company is ready to exit from coal.

The last obstacle that may have held up the sale of Bengalla was an ongoing legal dispute between the Bengalla joint venture and MACH Energy, who owns the neighbouring Mt Pleasant project. That dispute was settled last week.

The acquisition would be earnings accretive for New Hope, assuming 60% would be funded with equity. The coal miner had a $353 million cash balance at January 31.

New Hope is already one of the Bengalla joint venture partners, with a 40% interest acquired in 2016 from Rio Tinto Limited (ASX: RIO) for $865 million.

The stake in Bengalla proved vital for New Hope, with a surge in the mine’s production allowing them to post a strong half-year result in March, despite the contraction of output from the New Acland project in Queensland.

New Hope’s plans for the expansion of New Acland were halted by an adverse ruling of the Queensland Land Court, but the company successfully appealed the decision: today, the Queensland Supreme Court ordered that the matter would be referred back to the Land Court for further consideration.

At the time of writing, shares in New Hope are trading flat at $2.12.

Foolish takeaway

I think this is the right time for New Hope to increase its stake in Bengalla. Demand for coal is strong, and prices are likely to remain high as long as coal miners prefer buying existing projects rather than developing new ones – as demonstrated by the recent acquisitions of Rio Tinto’s coal assets.

Increasing the stake in Bengalla makes even more sense considering that New Acland’s expansion is still subject to judicial approval.

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Motley Fool contributor Tommaso Autorino has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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