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Posts Tagged ‘metallurgical coal’

Mining Week 24/’12: Steam coal world is changing

June 11, 2012 Comments off

Top Stories of the Week:

  • Indonesian and US supply drives coal prices lower
    • A surge of exports of thermal coal (used for power generation) from Indonesia and the increasing exports from the USA caused by domestic replacement of coal demand by gas demand are driving thermal coal prices to the lowest point in 2 years.
    • Continued low sales prices are causing various coal miners to get close to financial distress. As their share prices have decreased too, analysts expect a new wave of acquisitions in the industry.
    • Sources: Financial Times; Seeking Alpha
  • Alpha closes steam coal mines in USA
    • Alpha Natural Resources, the company that recently bought Massey for $8.5bln, is reducing steam coal production and cutting approx. 150 jobs by closing 4 small mines in Kentucky and offices in 4 US cities, aiming to reduce G&A by 50-60$mln/year.
    • The company mentions low coal prices and new regulations for coal-fired power plants as the key reasons that the mines have become uneconomical and are unlikely to return to making a profit.
    • Sources: Alpha Natural Resources news release; Wall Street Journal; Reuters
  • Xstrata reveals GlenStrata organization structure

    • The organization structure revealed in the merger documentation supporting Glencore’s bid for Xstrata shows a merger of the organization with very little initial integration. The heads of marketing of the business units continue to report to Glasenberg, and the heads of the asset groups continue to report to Davis.
    • Glasenberg agreed to not using his significant share of voting power to force any changes of the or structure for the first years after the merger.
    • Sources: Xstrata – Glencore merger documentation

Trends & Implications:

  • The global changes of steam/energy coal business are mainly demand-driven. China and India are building coal-fired power stations at a high pace, increasing their share of global demand. At the same time stronger regulation in the Western world and the promise of cheap gas are suppressing the demand. As a result the coal business is getting more global, with a larger part of demand being imported from overseas.
  • The business unit focus of the GlenStrata organization reveals an inclination to try to realize the arbitrage opportunities that make up a large part of the merger’s synergy potential on a product-by-product basis. Global markets for each of the products is diverse enough to make a generic approach to geographic, product, and timing arbitrage unpractical.

©2012 | Wilfred Visser | thebusinessofmining.com

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Coal’s Glow Attracts Major Miners

September 12, 2011 1 comment

“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

Macarthur backs Peabody-Arcelor offer

August 30, 2011 Comments off

“Macarthur Coal has backed a sweetened takeover bid from Peabody Energy of the US and European steelmaker ArcelorMittal that values one of Australia’s last remaining big independent coal miners at A$4.9bn (US$5.2bn). The recommendation by the Macarthur board came after PEAMCoal, a new entity owned by the bidders, lifted its offer price to A$16 a share from A$15.50. Macarthur shareholders are also entitled to a recently declared dividend, taking the total price to A$16.16 a share.

Barring a higher offer from a rival suitor, Tuesday’s agreement all but ends a protracted takeover tussle for Macarthur among multiple parties spanning more than a year. Macarthur said unnamed potential suitors had examined its books since PEAMCoal made its initial A$15.50-a-share offer, but ‘although it remains possible that a superior proposal might be made, none have emerged to date and there can be no assurance that any will emerge.’”

Source: Financial Times, August 30 2011

Observations:

  • PEAMcoal’s new bid is $0.50/share higher than the initial offer, adding some $0.2bln to the transaction value. The current bid is almost $2.0bln higher than Peabody’s offer in May 2010.
  • Macarthur agreed to a $51.4mln break-up penalty (1% of takeover price) and no shop/no talk clauses, making it hard for other parties to obtain detailed company information. However, various other potential bidders have already studied Macarthur’s books.

Implications:

  • By agreeing to PEAMcoal’s bid Macarthur’s board pressures potential other parties to hurry up. Anglo American is rumoured to be interested in bidding for the company, but no official rival bids have been made yet. As most interested parties have been in contact with Macarthur and studied the books already, the no talk clause is not very important, but Macarthur signals a decision has to be made quickly.
  • Key assumption in the valuation of Macarthur clearly is the coal price going forward. Synergies vary among potential bidders, but synergy value will be much lower than the value of the stand-alone cash flows of the company. As a result the company with the most optimistic forecast of the coal prices will be willing to pay most for Macarthur. This concept, in which the winner of an auction (or takeover process) runs a high risk of being too optimistic, is known as ‘the winner’s curse’.

©2011 | Wilfred Visser | thebusinessofmining.com

Peabody in new Macarthur move

July 13, 2011 Comments off

“Peabody Energy of the US has joined forces with steelmaker ArcelorMittal to make a A$4.7bn (US$5bn) bid for Macarthur Coal, the Australian coal miner that was at the centre of a failed three-way bid battle last year. With Chinese-driven demand for coal pushing up prices, Peabody is attempting to expand overseas. ArcelorMittal is seeking to buy mines to secure its steelmaking ingredients at reasonable prices. Macarthur is the world’s top exporter of a coal variety that is one of the hottest commodities in metals and mining. Macarthur received the indicative cash offer of A$15.50 a share on Sunday. It is conditional on the bidding consortium securing at least 50.01 per cent of the target’s shares.

Peabody made a A$15-a-share bid last year but the deal collapsed when it failed to secure backing from Macarthur’s board. At that time, ArcelorMittal and China’s Citic – Macarthur’s two biggest shareholders respectively owning 16 and 24 per cent – indicated they were unlikely to approve the takeover.”

Source: Financial Times, July 11 2011

Observations:

  • Peabody’s previous bid, which collapsed in May 2010, was made conditional on Macarthur’s board approval, which in turn was made conditional on 75% of the shareholder votes supporting the deal. ArcelorMittal, Posco, and Citic, controlling almost 50% of the shares, were afraid to lose contract rights and therefore did not support the deal at the time.
  • The $15.5/share bid holds a 40% premium over the share price prior to the announcement. The share price dipped in June to the lowest point in more than a year driven by low Japanese demand.

Implications:

  • ArcelorMittal ensures long term access to the coal from Macarthur and probably also other Peabody operations by taking a 40% stake in the deal. If the acquisition is successful the company makes an important step in becoming more self-sufficient in its raw material needs by integrating vertically.
  • Peabody would add approximately 25% of its size with the acquisition, and would make a big step to expand operations internationally. As Macarthur is one of the key suppliers of China’s coal demand it might happen that China’s steel industry, led by Citic, will try to outmanoeuvre ArcelorMittal by making a competing bid.

Note: on July 14th this offer was sweetened

©2011 | Wilfred Visser | thebusinessofmining.com

Arch to Buy International Coal for $3.4bln

May 3, 2011 Comments off

“Arch Coal Inc. said it will acquire International Coal Group Inc. for $3.4 billion, becoming the latest coal producer seeking to secure reserves and take advantage of rising prices in the market for metallurgical coal used by steelmakers. St. Louis-based Arch said the all-cash deal will create the fourth-largest coal producer globally and the second-largest U.S. producer of metallurgical coal. The appetite for the relatively scarce, deep-mined form of coal is driven by infrastructure growth in emerging economies like China, India and Brazil.

The deal will enable Arch, which has significant port and barge capacity, to boost exports of high-quality metallurgical coal currently produced by ICG, said Steven F. Leer, Arch’s CEO, in an interview. ‘They bring products we don’t have, and we bring infrastructure that they don’t have,’ Mr. Leer said. ‘It becomes a hand-in-glove fit.’ The combined company would have total shipments of 179 million tons of coal, based on 2010 results, including metallurgical and thermal coal.”

Source: Wall Street Journal, May 3 2011

Observations:

  • Both global steam coal (power generation) demand and metallurgical coal (steel making) demand are expected to rise strongly in the coming decade on the back of strong growth of BRIC-countries. As these countries will not be able to satisfy the domestic demand, imports will increase. This repositions North America as a potential large exporter of coal.
  • The announcement of the acquisition coincides with Massey’s report of a quarterly loss, indicating the cost pressure the industry in the USA is experiencing. Massey will likely be bought by Alpha Natural Resources for $7.1bln, creating a big competitor to the Arch-International combination.

Implications:

  • Arch expects annual cost savings of $70-80mln, justifying a premium of approx. $1bln over ICL’s pre-announcement market cap of $2.2.bln. However, in mid 2010 market cap was as low as $1.0bln. Additional revenue-enhancing synergies as discussed by mr. Leer are required to create value for Arch’s shareholders.
  • Most current merger and acquisition attempts in the US coal market are largely synergy driven. The American market lagged earlier consolidation trends in the global industry, leaving merger opportunities on the table in an industry with many small players. At the end of this wave of consolidation most likely some 2-4 large American coal miners will be created, potentially with strong cross-border activities in Canada.

©2011 | Wilfred Visser | thebusinessofmining.com

BHP Billiton: Organic growth enabled by high prices

February 16, 2011 Comments off

“An improving economic backdrop and broader supply constraints continued to support the fundamentals for the majority of BHP Billiton’s core commodities. Stronger realised prices in the December 2010 half year increased. Underlying EBIT by US$8,531 million, net of price linked costs. Industry wide operating and capital cost pressures are, however, being experienced across a range of businesses and BHP Billiton is not immune from that trend. The devaluation of the US dollar and inflationary pressures reduced Underlying EBIT by a combined US$1,415 million.

Operating cash flow of US$12,193 million resulted in the Group ending the December 2010 half year in a net cash position. This balance sheet strength affords BHP Billiton substantial flexibility as it embarks on significant investment in organic growth that is expected to exceed US$80 billion over the five years to the end of the 2015 financial year. Major projects, including those in iron ore and metallurgical coal, are at an advanced stage of the approvals process and should result in a substantial increase in sanctioned project capital expenditure.

Notwithstanding the significant commitment towards growth, BHP Billiton has declared a ten per cent increase in its interim dividend to 46 US cents per share and has announced an expanded US$10 billion capital management program. BHP Billiton will continue to consider both on and off-market execution for the US$10 billion program and, subject to market conditions, expects to largely complete the initiative by the end of the 2011 calendar year.”

Source: BHP Billiton press release, February 16 2011

Observations:

  • The impact of commodity prices on the results for this half year vs. the half year ending December 2009 were: Iron ore +$4.4bln; Base metals +$1.4bln; Metallurgical coal +$1.1bln; All other +$1.7bln.
  • Total investment pipeline for the coming 5 years is approx. $80bln (excl. exploration), half of which will be invested in the iron ore and petroleum business. Especially the budget for pre-feasibility studies (over $20bln) underlines BHP’s ambition to spur organic growth.
  • BHP expects to largely complete a $10bln additional capital management program in 2011, aiming to return a large part of the cash pile of over $16bln to shareholders.

Implications:

  • Revenues and profits have shot up due to price increases. However, just as in the case of Rio Tinto, controllable costs have increased. Extreme weather conditions only partly explain this cost increase. Of the major diversified miners publishing their results this month only Xstrata managed to reduce the controllable costs. Key focus for the large miners in the near future will be to carefully select investments and to keep costs in running operations down.
  • The capital program of $80bln over 5 years and the dividend payout of roughly $5bln a year require the company to have a positive cash flow from operations of some $10-11bln in each half year. At the rate of producing cash in the last 6 months ($12bln for the half year) the company is still building up a reserve that would enable it to make additional acquisitions.

©2011 | Wilfred Visser | thebusinessofmining.com

Alpha agrees to buy Massey for $8.5bn

January 31, 2011 Comments off

“Alpha Natural Resources, the third-biggest US coal producer, agreed to buy its rival Massey Energy for about $8.5bn in cash and stock, as the consolidation of the global coal sector continues apace.

Under the terms of the deal, Massey shareholders receive 1.025 Alpha shares plus $10 cash for each share held, valuing Massey at $69.33 a share, or 21 per cent more than its last trading price on Friday. The $8.5bn valuation includes net debt.

The combined operations will own more than 110 mines and coal reserves of about 5 billion tons, including one of the world’s largest metallurgical coal reserves. Alpha itself has 60 active mines throughout Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming.”

Source: Financial Times, January 29 2011

Observations:

  • The announcement of the deal does not mention how the companies will handle potential liabilities springing from the safety investigations following April’s disaster in which 29 miners were killed. The deal is subject to shareholder and regulatory approval.
  • The merged entity will be the coal champion of North America, but will still be mainly focused on supplying the domestic industry.

Implications:

  • Will the agreement between Massey and Alpha lead to other bidders? Most likely not. ArcelorMittal was interested earlier, but the synergies to be achieved by Alpha might be larger and the corporate cultures of the companies are clearly more aligned. An alternative bidder will have to come with a very large premium to prevent Massey’s board from convincing the shareholders of the merits of merging with Alpha.
  • The $8.5bln deal (including net debt of approx. $1.4bln, making net deal value some $7.1bln) is one of the largest across industries in the last months. The deal shows the resurgance of mining M&A to be expected in 2011, with coal and gold being the primary commodities that will trigger M&A.

©2011 | Wilfred Visser | thebusinessofmining.com

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