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Australia's Gloucester Coal shareholders approve merger with Yancoal

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Shareholders of Gloucester Coal have approved the merger with Chinese-owned Yancoal, which the Sydney-based miner believes will help it stay competitive in a period of soft thermal and metallurgical coal prices.

At a meeting in Sydney on Monday, 98.4% of Gloucester shareholders voted in favour of the merger, which will create a company producing around 12 million mt/year of thermal, coking and pulverized coal (PCI) across operations in Australia and China.

Following the merger, Chinese parent company Yanzhou Coal Mining Co. will own 78% of Yancoal, while Gloucester will retain a 9% stake and Hong Kong trader Noble Group 13%.

Gloucester chairman James MacKenzie told shareholders that a merger with Yancoal would provide "greater scale, diversification and a competitive cost base" which were "particularly significant in the current coal market where prices are subdued."

Gloucester and Yancoal had a combined resource base of around 3.5 billion mt of thermal and metallurgical coal and reserves of around 700 million mt, MacKenzie said.

The merged group expected to increase its total coal production capacity from 12-13 million mt/year currently to 25-33 million mt/year by the end of 2016. The two companies could also look at blending their respective coals, MacKenzie said.

The backing of Yanzhou could allow Gloucester to speed up development of its Hunter Valley projects and make use of excess port capacity in New South Wales. Yancoal already owns coal assets in Queensland and New South Wales, including the Ashton mine in the Upper Hunter Valley, which can produce up to 3 million mt/y of semi-soft coking coal.

RBC Capital Markets analyst Chris Drew said a merged entity would be in a stronger position than Gloucester continuing as a standalone company. But high debt levels and operating costs would also "challenge the merged group in the current environment of depressed thermal coal prices and soft second tier metallurgical coal markets."

A spokeswoman for Gloucester was unable to say if the merger would alter the miner's sales strategy. Gloucester has been forced to increase its spot sales into China this year due to a lack of demand for its high-sulphur, semi-soft coking coal in Japan and South Korea.

Gloucester sold a total 570,000 mt of metallurgical coal in the January-March quarter, an 82% increase on the previous quarter due to stronger production from its Middlemount mine in Queensland.