Coal news and updates

Coal Assets Abound for Those Willing to Bet on Rebound: Real M&A

For patient investors brave enough to call a bottom on coal, now may be the time to invest in the estimated $15 billion of mines up for grabs.

Coal has lost more than half its value in the past four years. Expanding production and an economic slowdown in China, the largest market for the fuel, created a supply glut. Now Glencore Plc, the world’s biggest shipper of power-station coal, is cutting supply, with analysts projecting price gains again by next year through 2018.

“People are starting to feel that a bottom has been reached or is close to being reached,” Viktor Tanevski, a coal analyst at Wood Mackenzie Ltd., said by phone from Sydney. “Most of the miners do expect a recovery in prices. For a buyer, if they have that mindset, it’s a potentially good investment proposition.”

While buyers are starting to emerge, they’re still outnumbered by sellers and there’s only been a trickle of activity this year. Anglo American Plc and Cliffs Natural Resources Inc. are among those considering asset sales, and according to Jefferies LLC, Rio Tinto Group could add its own $3.6 billion coal business to the list as it shuffles assets. Even so, with coal showing signs of reaching a trough, deals will probably rebound in the months to come, Tanevski said.
Deal Flow

The value of coal acquisitions and investments worldwide has reached just $199 million this year after totaling $8.1 billion in 2014, according to data compiled by Bloomberg. The highest annual tally was $38 billion in 2011.

The price of coal soared last decade as it powered economic expansion in Asia. It has since tumbled as the global economy struggled to emerge from the financial crisis. Efforts by countries including China and the U.S. to cut carbon emissions and switch to cleaner forms of energy such as natural gas also threaten coal’s dominance.

Even so, its central role in energy production isn’t likely to diminish any time soon, said Jock O’Callaghan, energy, utilities and mining leader at PricewaterhouseCoopers in Melbourne.

“Long-term demand for coal is far from dead,” he said by phone. “Even in developed nations, the changing of the fuel mix is not happening as quickly as many thought it would.”

India, for example, relies on coal for about 60 percent of the country’s electricity generation capacity and Coal India Ltd. has missed output goals for at least five years. Analysts are projecting higher prices partly because of greater imports by India, said Alex Tonks, a Sydney-based coal industry consultant at CRU Group.

Coal Confidence

The average price of power-station coal from the Australian port of Newcastle, the world’s biggest export hub for the fuel, will be 8.4 percent higher in 2016, according to the median analyst forecast compiled by Bloomberg. It will climb 5.8 percent the following year and 4.8 percent in 2018, estimates compiled by Bloomberg show.

“There is some degree of confidence that we have seen the bottom,” Richard Gannon, head of metals and mining mergers and acquisitions at Deutsche Bank AG in Melbourne, said by phone. “There is a healthy list of potential investors but they are very discerning.”

Private Buyers

This year’s largest transaction, valued at only $74 million, was the agreement in February by KC Euroholdings Sarl to buy Coalspur Mines Ltd., a company exploring in Alberta, Canada. KC Euroholdings is an affiliate of Chris Cline’s Cline Group. He’s the main owner of Foresight Energy LP, the St. Louis-based coal producer that listed in June last year.

Privately owned companies such as Cline Group are among potential buyers because they’re able to take a longer-term view on an investment than many publicly traded rivals, said CRU’s Tonks.

Also last month, West Virginia businessman Jim Justice bought back a coal producer once owned by his family for $5 million, less than 1 percent of what he sold it for in 2009 to Russia’s OAO Mechel. That typified recent U.S. coal deals, with an opportunistic buyer picking up cheap assets that it knows well, said Ted O’Brien, chief executive officer of Doyle Trading Consultants LLC. Mechel had idled the West Virginia mines last year because they weren’t profitable.

“There are a lot of assets publicly on the sales block and there are certainly a lot of parties kicking the tires at assets throughout the U.S. coal industry,” O’Brien said.

Risks Remain

Even if coal is set for a rebound, there’s a risk for buyers that it could take longer than expected, causing them to lose money on the deals.

In July, Toronto-based Corsa Coal Corp. paid $60 million for U.S.-based PBS Coals, less than a tenth of what Russian Steelmaker OAO Severstal had paid for the Pennsylvania producer six years earlier. Corsa then idled two of the newly acquired mines in January, cutting 25 percent of its Northern Appalachia workforce and citing the persistent slump in the price for metallurgical coal.

Some potential buyers are singling out assets producing coal with fewer impurities that can be sold in Japan, South Korea and China, according to Deutsche Bank’s Gannon. Private equity firms and companies across Asia are among the possible suitors, he said.

Mitsui & Co., Japan’s second-largest trading house, in December agreed to pay $763 million to join Vale SA in a Mozambique coal project.

X2 Resources, the investment fund founded by Mick Davis, the former chief executive officer of Xstrata Plc, said last week it had $4 billion to spend immediately.

Price Gap

With prices now forecast to rise, one reason for the stagnant pace of deals is a lingering divide between what buyers will pay and sellers will accept, according to O’Callaghan at PricewaterhouseCoopers.

Some coal producers would rather hold onto assets that could potentially gain in value than sell them if they don’t have to. John Eaves, president and CEO of St. Louis-based Arch Coal, said on an earnings call last month that to the extent a buyer approached the company and put a value on non-strategic assets, “we’d certainly be compelled to look at a transaction.”

source: http://www.swissinfo.ch