South32 scoops up Peabody's Metropolitan coal mine in $200m deal

South32 (ASX, LON, JSE:S32) has finally scored a deal by grabbing Peabody Energy's Metropolitan coal mine in Australia for $200 million.

The BHP Billiton’s spin-off, which had been looking for assets to add to its portfolio for quite a while, mainly lithium and copper ones, said the deal includes a 17% interest in the Port Kembla Coal Terminal, south of Sydney.

South32 and Peabody, once the world's largest privately-owned coal producer which filed for bankruptcy in April, said they will set up a mechanism to share the benefits of further possible strength in coal prices in the year ahead, whereby extra cash flow is split on sales above agreed prices.

The company said it would continue to take an opportunistic approach to growth opportunities in the "attractive" coking coal sector.

Prices for coking coal, used in steelmaking, have been rallying this year mainly because of restrictions on China’s own production.

Coking coal climbed again Friday, adding 2.7% to trade at $265.50 a tonne. The fresh addition brings one-month gains for the steelmaking raw material to more than 24%.

Based on data provided by the Steel Index, Australia hard coking coal prices are up more than three-fold since hitting multi-year lows around $70 a tonne in November 2015.

Metropolitan is underground mine that has a capacity to generate 2.3 million tonnes of coal a year. It’s located only 10km east of South32’s Appin Colliery mine.

The deal represents South32's first acquisitive move since it was spun out from BHP in May 2015. Not that the company hadn’t try to secure a new asset before. In August, it was outbid by China Molybdenum when it tried grabbing Anglo American’s niobium and phosphate unit in Brazil.

South32 also already manages the Port Kembla Coal Terminal on behalf of a consortium of miners that includes Glencore.

The firm's chief financial officer, Brendan Harris, recently told Financial Review that it will continue to take an opportunistic approach to growth opportunities in the "attractive" coking coal sector. He added that increasing South32 presence in Australia's coking coal market was a "good" strategy as demand for the commodity is expected to remain strong, supporting a long-run price which would remain healthy though "substantially below where we are today".

The deal, expected to close in the first quarter of 2017, should help Peabody complete a five-year plan, which aims to help it emerge from bankruptcy. The miner's Australian subsidiary owns nine mines in New South Wales and Queensland.

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