Home > Market change, Mergers & Acquisitions > Coal’s Glow Attracts Major Miners

Coal’s Glow Attracts Major Miners

September 12, 2011

“The sector’s confidence in emerging market demand for coal, especially the sort used in steel making, is keeping deal activity brisk. Four of the 10 largest mining-sector mergers and acquisitions in the first half of this year were for metallurgical coal assets, according to PwC. Total deal value so far this year, at nearly $19 billion, is already close to last year’s $22 billion total. Peabody Energy and ArcelorMittal’s $5 billion agreed bid for Macarthur Coal late last month is unlikely to be the last transaction. Anglo American, which was in the running for Macarthur, remains on the prowl for acquisitions, as do other mining majors.

But strong demand and a scarcity of top-notch coal assets can lead to punchy valuations. Acquirers this year have paid 13.2 times trailing operating profit for coal companies, compared with an 11.2 times average over the previous decade, according to IHS Herold. Peabody and ArcelorMittal are paying 20.8 times trailing operating profit for Macarthur.”

Source: Wall Street Journal, September 9 2011

Observations:

  • Top coal mining deals of the last year include Peabody-Arcelor’s (PEAMcoal) $5.2bln bid for Macarthur, Itochu’s $1.5bln Drummond deal, Alpha Natural Resources $8.5bln acquisition of Massey, and Arch Coal’s $3.4bln acquisition of International Coal.
  • In a poll on this site in January 38% of respondents indicated coal would be the commodity triggering most M&A in 2011.

Implications:

  • The key drivers for high valuations of coal producers in the last year are consolidation of the North American industry and the ‘need’ for steelmakers to integrate vertically and secure the access to a stable supply. A similar trend could drive up valuations of iron ore mines if growth of demand keeps up and ramp up of capacity of the major miners goes as slow as expected.
  • Most of the recent acquisitions in the coal sector have been done by Indian steelmakers or US coal miners, with targets often in Indonesia, Australia and Southern Africa (all relatively close to Asian consumers). Surprisingly Chinese companies are not yet playing an important role. Strategic acquisitions by Chinese steelmakers and/or coal mining giants, supported by government institutions, could further drive up valuation ratios of metallurgical coal assets in the area.

©2011 | Wilfred Visser | thebusinessofmining.com

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  1. Mining engineer
    September 13, 2011 at 12:48 pm

    great blog, I really like to read it. You should separate here more strictly between thermal and coking coal – the Itochu deal is only thermal coal for example. A steelmaker cannot invest in coking coal in Indonesia, Indonesia is only producing thermal coal (95%). But please keep it up, great stuff!

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