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Posts Tagged ‘PEAMcoal’

Mining Week 44/’11: Exchange rate and steel headwinds

October 30, 2011 Comments off

Top Stories of the Week:

  • Peabody and ArcelorMittal get MacArthur; then ArcelorMittal gets out
    • Only 2 days after PEAMcoal, the vehicle set up by Peabody energy and ArcelorMittal to buy Macarthur, announced it obtained a majority interest, Arcelor decided to get out of the combination. The company will sell the 16% of Macarthur it had to Peabody. Peabody had teamed up with ArcelorMittal because an earlier bid had not gained the support of the major shareholders.
    • Sources: Reuters; Financial Times; ArcelorMittal press release
  • Vale suffers $2.8bln exchange rate hit
    • Vale posted disappointing results for the 3rd quarter: the weak Brazilian real compared to the US dollar hit the company hard, iron ore spot prices dropped 27% q-on-q, and production volumes were lower than planned.
    • Sources: Vale press release; Financial Times; Wall Street Journal

Trends & Implications:

  • The move of ArcelorMittal out of the Macarthur acquisition is a surprising sign of hesitance and uncertainty about the development of the global steel market. The company prefers cashing $700mln over having to pay an additional $1.2bln to get 40% of the Australian coal miner. It still plans to build an iron and coal mining business to increase self-sufficiency. US steelmakers are also struggling and iron ores prices have plummeted in expectation of falling steel demand.
  • Exchange rates remain a very important factor in the competitiveness of miners because sales for miners around the world are typically in US dollars, irrespective of the currency in which costs are incurred. As shown in the exchange rate graphs below the Brazilian real has been hit harder than the Australian dollar, key currency for iron ore production of Rio Tinto and BHP Billiton, in the past quarter.

©2011 | Wilfred Visser | thebusinessofmining.com

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