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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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Itochu beats rivals to $1.5bln Drummond deal

June 17, 2011 Comments off

“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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