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Whitehaven’s funding strategy

Whitehaven Coal (ASX:WHC) plans to acquire two Queensland coking coal mines from BHP and Mitsubishi, opting for a traditional layaway plan over modern equity/debt packages preferred by banks and corporate advisers.

Whitehaven will initiate the deal with a multi-billion dollar deposit, followed by staged repayments over the next couple of years, ultimately reaching $US3.2 billion (approximately $A5 billion).

The funding for this acquisition, including three contingent performance-related payments, will come from available cash, a $US900 million bridge facility, and the cashflows generated by Whitehaven’s expanded business over FY2025, FY2026, and FY2027.

Whitehaven emphasizes that this acquisition is highly attractive and is expected to significantly boost earnings.

One of the reasons behind this unconventional cash-based layaway plan is to bypass the need for shareholder approvals, as no equity issuance is involved. With a London-based hedge fund pressuring Whitehaven to return cash to shareholders and the potential for disruptive shareholder meetings, this approach helps circumvent such challenges.

Moreover, choosing cash over equity financing eliminates the hurdles associated with securing funding for fossil fuel mega-deals and allows Whitehaven to avoid potential confrontations with environmentalists and climate change protestors during shareholder meetings.

The payment structure for the $US3.5 billion deal consists of an upfront consideration of $US2.1 billion upon completion, along with separate tranches of $US500 million, $US500 million, and $US100 million in deferred considerations payable on the first, second, and third anniversaries of the completion date.

Additionally, there are contingent payments of up to $US900 million, based on realized pricing exceeding agreed thresholds, with annual contingent payments capped at $US350 million.

Whitehaven is also exploring the possibility of a minority sell-down to global steel producers through a strategic joint venture arrangement, which could reduce its overall funding requirements.

The company and CEO, Paul Flynn, justify this transaction by highlighting its potential for significant value upside and attractive growth opportunities in Queensland’s Bowen Basin, including synergies with Whitehaven’s Winchester South development project.

This acquisition will transform Whitehaven into a metallurgical coal producer, aligning with its strategy. The pro-forma managed Run of Mine (“ROM”) production is projected to be around 40 million tonnes annually, with revenues consisting of approximately 70% metallurgical coal and 30% thermal coal.

This move solidifies Whitehaven’s position as the leading Australian ASX-listed metallurgical coal producer, offering increased diversification and scale benefits. Additionally, it enhances exposure to high-growth market regions like India and Southeast Asia while diversifying end market exposures currently focused on Japan, South Korea, and Taiwan.

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