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Coal Mining Preview

Climate transition fires creative deal landscape for coal miners

Market overview

Coal. Possibly the most taboo four-letter word in the English language. There is no doubt regarding its position of infamy in the new world of ESG awareness but, like oil, it is a commodity that will have an industrial use for decades to come.

No one wants to be seen owning coal mining businesses or coal-fired power generation assets, and yet investors could be making money from them for the foreseeable future.

The West outright shuns coal-fired power generation but, while the cost of renewables has become competitive, developing economies in Asia and Africa still need to ramp up power generation capacity and coal is likely to form some part of the continued energy mix.

Herein lies the seed of a potential slew of coal-related M&A deals, as many publicly orientated strategic and financial owners seek to divest or carve out their cash-generating coal assets.

BHP [LON:BHP; ASX:BHP] has long sought to phase out its coal business, while Anglo American [LON:AAL] has announced its plans to spin off its South African coal business.

Meanwhile, Wescoal [JSELWSL] is to make a decision soon on a disposal of its coal trading business due to its low returns amid depressed international coal prices. The slump in electricity demand saw thermal coal prices dive to below USD 35/ton in April, the lowest since 2016, with it now having recovered to just above USD 50/ton.

But the M&A landscape is not that black and white – coal is not coal. The hope that institutional investors appreciate the difference between metallurgical coal – used for smelting and industrial purposed – and thermal coal – burnt for power generation – underpins aspirations that there will remain public funding of coal acquisitions and projects.

Newly-listed Contango Holdings [LON:CGO] is betting on just that as it embarks on a consolidation drive across Southern Africa. Met coal is likewise the focus of Czech consolidator Sev.en Energy as it seeks mines and power stations to boost its portfolio.

The price of metallurgical, or coking, coal is predicted to rise in the future as the demand for steel returns following the dive in construction projects due to COVID-19.

However, while those who know their coal will distinguish between the two forms, it may be that the pace of climate awareness is such that coal in all its forms is branded unacceptable to own by institutional investors. This would further accelerate the shift of ownership to private investors, however, that buyside pool is murky.

Commodity trading companies may step into the breach and look to pick up mines, as has been seen in the oil and gas space. However, these acquirers do not always have the required operational expertise to develop and run a mine, so there is a limit to the amount of buyside interest that may be shown.

As the use of coal become more restricted to industrial use it could be that the end users, steel companies and other smelting businesses, see an increasing value proposition in securing the sources of production. However, these businesses would likewise need to learn the skills of mining fast if efficiency is to be maintained.

There is likely to be an increased use of non-equity related funding methods such as offtake agreements, royalties and streams.

These project finance structures were sometimes shunned in the past by juniors keen to retain future cash flows so as to attract a takeover from a mining major. Without these majors scooping up prospective coal projects there will need to be other ways to create value.

The future for coal is not looking bright but the transition in coal use and level of demand will hopefully lead to a creative deal dynamic in the short term as advisers scramble to match the assets with the publicly acceptable owners.

Recent deals

Announced DateTarget CompanyBidder CompanySeller CompanyFinancials (USD)
27-Mar-18Kestrel Coal Resources Pty Ltd (80% stake)
(Australia)
Adaro Energy Tbk PT; and EMR Capital
(Indonesia)
Rio Tinto Plc
(United Kingdom)
Deal Value: 2.3bn
20-Mar-18Hail Creek Coal Pty Ltd (82% stake); and Valeria coal development project (71.2% stake)
(Australia)
Glencore Plc
(Switzerland)
Rio Tinto Plc
(United Kingdom)
Deal Value: 1.7bn
22-Apr-20Elgaugol JSC (51% stake); Elga-Doroga OOO (51% stake); and Mecheltrans-East OOO (51% stake)
(Russia)
A-Property LLC
(Russia)
Mechel OAO
(Russia)
Deal Value: 1.2bn
21-Nov-18Inner Mongolia Kailuan Investment Co Ltd
(China)
Kailuan Energy Chemical Co Ltd
(China)
Kailuan Group Co Ltd
(China)
Deal Value: 641m
Revenue: 109.2m
EBITDA: 47.7m
(2017)
07-Aug-18Bengalla Mining Company Pty Limited (40% stake)
(Australia)
New Hope Corporation Limited
(Australia)
Wesfarmers Limited
(Australia)
Deal Value: 638m
Revenue: 35.2m
(2018)
29-Nov-17CONSOL Energy Inc
(USA)
CNX Resources Corporation (Shareholders)
(USA)
CNX Resources Corporation
(USA)
Deal Value: 602m
Revenue: 1.2bn
EBITDA: 257.2m
(2016)
24-Aug-17Inner Mongolia Yitai Guanglian Coal Chemical Co Ltd (10% stake)
(China)
Inner Mongolia Yitai Coal Co Ltd
(China)
Inner Mongolia Yitai Group Co Ltd
(China)
Deal Value: 574m
23-Mar-20Elgaugol JSC (49% stake); Elga-Doroga OOO (49% stake); and Mecheltrans-East OOO (49% stake)
(Russia)
A-Property LLC
(Russia)
Gazprombank OAO
(Russia)
Deal Value: 563m
22-Dec-17Curragh Coal Mine
(Australia)
Coronado Global Resources Inc
(USA)
Wesfarmers Limited
(Australia)
Deal Value: 540m
18-Dec-18Clermont Coal Mine (31.4% stake); and Ulan Coal Mine (10% stake)
(Australia)
GS Coal Pty Ltd; and Glencore Coal Pty Limited
(Australia)
Mitsubishi Development Pty Ltd
(Australia)
Deal Value: 539m


Companies to follow

Octagon Minerals (28/07/20)

Octagon Minerals, a South African coal miner, is looking to raise around ZAR 600m (USD 36m) to finance at least three acquisitions, Managing Director Waheed Sulaiman said. It could sell up to a 49% stake as part of its growth strategy, Sulaiman said, declining to confirm whether it would mandate an advisor for the stake sale. It looks to raise the funds through a combination of equity and debt.

Wescoal (24/07/2020)

Wescoal [JSE:WSL], a South African coal-focused mining company, will make a decision regarding a potential sale of its coal trading business in coming months, CEO Reginald Demana said. Any decision to exit or retain the business will be based on the potential of the trading unit to return to a sustained level of profitability. Wescoal attributed the decline to adverse market conditions, including a decline in international coal prices and challenges in the domestic coal sales market.

ABM Investama (14/07/2020)

PT ABM Investama [IDX:ABMM], a mid-sized Indonesian coal miner, is scouting for coal miners in Kalimantan and or in Sumatra islands to boost coal output in preparation for a possible recovery in the global coal market, corporate secretary and spokesperson Rindra Donovan said. The Jakarta-based company is looking at more than 100 coal mining sites across the archipelago. The company is looking at one target in Aceh, in the Northern part of Sumatra island, and another one in South Kalimantan. Media reports in June said ABMM is readying USD 150m-USD 250m for acquisitions, using a combination of internal funds and loans. Ideally, the company would use 20% of its own cash and the remainder 80% would be in the form of bank loans.

Kholevu Mining (13/07/2020)

Kholevu Minerals, a South African mining company, could sell a 49% stake in its unit to raise around ZAR 245m (USD 14.5m), Managing Director and co-owner Vuyani Ncoko said. It looks to raise funds for a subsidiary company, which will own an underground coal gasification (UCG) pilot plant. It will look at various funding sources including debt, equity, and grant funding. The company recently engaged a financial advisor to help with its capital raising plans. An ideal equity investor will be an energy company willing to operate in South Africa. It also plans to approach funders such as the Development Bank of Southern Africa (DBSA) for debt and grant funding. The junior miner has appointed Johannesburg-based corporate financial advisory firm Lehumo Capital to handle the fundraising process alongside Ntuthuko’s management.

Shaanxi Energy (10/07/2020)

Shaanxi Energy Investment (Shan Neng Gu Fen), a state-owned Chinese coal mining and coal power company, is in fundraising talks with investors as its initial public offering plan is delayed, two sources familiar with the situation said. The Shaanxi-based company had planned to file for a listing early this year. However, the plan was delayed due to the novel coronavirus situation. The company is talking with potential strategic and financial investors and remains receptive to approaches from interested investors. It hopes to raise more than CNY 100m (USD 14.2m) via a stake sale and wants to close a deal this year.

PT Bukin Asam (01/07/2020)

Indonesian state-owned coal miner PT Bukit Asam [IDX:PTBA] continues to scout the market to acquire a coal miner in its bid to boost business, said Hadi Surya Palapa, corporate secretary and official spokesperson of the company. The state-owned listed coal producer has been looking to acquire a coal miner in the last two years but has not found the right target. A feasibility study was done two years ago, but the right target has not been found. The potential target should be located near the sea or river and ports, making it easier for PTBA to ferry the coal into ports. The acquisition is aimed at boosting coal transportation capacity. PTBA has abundant potential coal reserves in Sumatra island but has logistical problems in transporting the coal. A potential acquisition can be funded through internal cash, convertible bond issuance or bank loans or a combination of such options.

Ntuthuko (25/06/2020)

Ntuthuko Exploration and Mining, a South Africa-based coal miner, is looking to raise USD 90m to finance the acquisition of two coal assets, Executive Chairperson Sifiso Nkosi said. The company is actively seeking investors after initial negotiations with an undisclosed domestic venture capitalist (VC) firm collapsed due to the coronavirus outbreak. The company is looking to raise the capital in a combination of equity and debt structured at a 70:30 ratio in favour of debt, Nkosi said, declining to comment on whether the equity portion would represent a majority or minority stake in the business.

Contango Holdings (24/06/2020)

Contango Holdings [LON:CGO] will pursue further mining acquisitions later this year once progress has been made at its recently acquired Lubu coking coal project in Zimbabwe, Executive Director Carl Esprey said. In early May, the company announced its admission to trading on the LSE’s main market following the completion of a reverse takeover of Consolidated Growth Holdings' interest in the Lubu Coalfield Project, which was acquired for an implied value of GBP 6.4m.The company continues to look at other acquisitions in the Southern Africa region, in Zimbabwe and nearby countries as it wants to build a portfolio of cash flow generating assets. These targets will be similar to Lubu, projects where Contango can invest in order to bring the asset into cash generation within a year. Contango was founded to target such assets that can be brought quickly into production with a low capital cost, so that it can generate cash flow and deliver on a dividend policy as soon as possible.

Mooiplaats Colliery (11/06/2020)

Mooiplaats Colliery, a South Africa-based thermal and metallurgical coal producer, has shelved its acquisition plans due to coronavirus-linked uncertainties, CEO Louis Loubser said. The company, which is based in South Africa’s Ermelo coalfields, was in the market for multiple domestic targets prior to the COVID-19 outbreak but has now shelved the process to concentrate on internal operations and non-capital expenditure. It exports a large part of its production to India, which has reduced its coal offtake due to the pandemic and lockdown-linked pressure. The coal sector is facing reduced demand and the situation is likely to remain unchanged till early next year. South Africa’s coal sector is likely to recover around 3Q21 and it is difficult for the companies to expand in the current market conditions.

Sev.en Energy (11/06/2020)

Sev.en Energy, a Czech energy and mining group, is actively seeking targets in Western Europe, US and Australia and is also interested in opportunistic acquisitions globally, executive director Alan Svoboda said. It has mainly focused on buying conventional coal and gas power generation plants but has recently widened its scope to also include metallurgic coal assets. It is seriously looking at around five or six targets in Europe and the US and is taking a more holistic approach to geographies where it may invest. Sev.en Energy is ready to play a key role in consolidating the metallurgical coal sector in the US and Australia. There is room for consolidation in the US segment, which can become a stronger competitor to the sector in Australia. The average deal size is likely to be EUR 100m or more. It is likely to make larger deals when entering new markets and could make smaller EUR 20m- EUR 50m deals as add-ons.

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