New Wesfarmers boss Rob Scott has struck his first major deal since taking the reins last month, moving the group a step closer to an exit from coal with the $700 million sale of its Queensland mine.
“It’s an end of an era within having operational control of coal mines, that’s for sure,” Mr Scott said on Friday.
“But I think what it does is it highlights how important diversification has been to Wesfarmers shareholders over time. So it shows that we’re able to generate quite good returns in a range of industries.
“And if you look at our chemicals, energy and fertiliser business at the moment, it’s one of our strongest performing businesses in the portfolio.”
Mr Scott, who was elevated to chief last month, said the sale of the Curragh mine to America’s Coronado Coal Group was “a good validation of the Wesfarmers model”.
Wesfarmers, whose businesses include hardware chain Bunnings, Coles supermarkets and retail chains Kmart, Target and Officeworks, estimates it will reap a post-tax profit of about $100 million from the sale.
It is continuing a strategic review of its remaining coal asset – a 40 per cent stake in the Bengalla Coal mine in NSW’s Hunter Valley.
Mr Scott said he expected the Curragh sale, which requires Foreign Investment Review Board approval, to be completed in the next six months. It was yet to decide how it would use the proceeds.
“When we get the proceeds we’ll either look at investing it in our existing businesses, or giving it back to shareholders or paying down debt,” he said.
Wesfarmers bought the Curragh mine, near Blackwater in Queensland, for about $200 million 17 years ago. It is considered one of the world’s largest metallurgical coal mines, with baseline production of about 8.5 million tonnes of metallurgical coal a year, and a further 3.5 million tonnes a year of steaming coal.
“The current business is one that we’ve generated very strong returns from over the years. We’ve delivered an IRR of over 40 per cent per annum. There’s a lot of volatility in coal pricing and we thought that now was a good time to crystallise the value in the business,” Mr Scott said.
Wesfarmers was buoyed by growth in its industrials division in the past financial year off the back of strengthened coal prices. Revenue from mining grew $738 million to $1.74 billion, and EBIT swung from a $310 million loss in 2016 to a $405 million profit.
The overall group reported net profit after tax of $2.87 billion for the year.
The deal will generate ongoing revenue for Wesfarmers, which will receive a quarter of the mine’s export coal revenue above a metallurgical coal price of $US145 a tonne over the next two years.
Wesfarmers last year announced it was evaluating all strategic options for its resources business.
In a research note, Citi analysts said the Curragh mine sale price was “modest and does not include a significant takeover premium in our view”.
“The deal is potentially EPS [earnings per share] dilutive by 4 per cent on a pro forma fiscal 2018 basis. However, we note the contingent payment could be up to $285 million if current spot prices prevail for the next two years,” they said
Citi also said it retained its sell rating and $39 target price on the stock.
Shares in Wesfarmers dropped 43?? on Friday, to close at $44.22.