Home > Mergers & Acquisitions > Itochu beats rivals to $1.5bln Drummond deal

Itochu beats rivals to $1.5bln Drummond deal

June 17, 2011

“Itochu, the Japanese trading house, has beaten global commodities and mining rivals, including Glencore and Xstrata, to secure a 20 per cent stake in Colombian coal assets owned by Drummond, a family owned US mining company, for $1.52bn. The deal, announced on Thursday, is the clearest sign of the renewed appetite among Japanese traders for thermal coal, the commodity used to fire power stations, as the post-tsunami nuclear crisis threatens the future of electricity generation in the country.

The transaction values the assets at $7.6bn, well above the $6bn that other bidders were prepared to pay, highlighting the rapid appreciation of coal assets driven by strong demand from Asia. China and India have joined traditional buyers such as Japan and South Korea in competing for supplies, which has driven up prices. Berlin’s decision to phase out nuclear power in Germany could also boost demand in Europe. Drummond said that the transaction would give Itochu “rights” to market coal produced in the Colombian mine into Japan.”

Source: Financial Times, June 16 2011

Observations:

  • Last November Glencore was reported to be interested in buying Drummond’s Colombian assets: Mina Pribbenow and El Descanso open-pit coal mines located in the Cesar Coal Basin near La Loma; Puerto Drummond, a deep-water ocean port on the Caribbean Sea near Santa Marta; and coal transportation and handling facilities.
  • Itochu, a Fortune 500 trading company with approx. $150bln annual revenues, hopes to benefit from high prices for steam coal in Japan. It will get the rights to market coal from the Colombian assets, which will still be operated by Drummond, in Japan. Drummond will use the funds from the sale of the 20% ownership of the assets to increase the capacity of the mines.

Implications:

  • After the nuclear crisis in Japan the interest in coal fired power in the country has returned, increasing the market value of steam coal. Itochu is hoping to benefit from this trend in the long term, but will now also benefit from the profitability of the Colombian assets.
  • The ownership stake bought by Itochu does not prevent any other company from buying out Drummond and gain control over the assets. The sale of this stake gives a potential acquirer a clear valuation, which could help to bid for the remaining 80%. To Itochu this would not necessarily be an issue, as long as the contracts to market the coal in Japan are not changed.

©2011 | Wilfred Visser | thebusinessofmining.com

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