The acceleration of coal deal flow

IT IS doubtful Glencore Xstrata chief executive Ivan Glasenberg finds the time or has the inclination to read the weeklyHogsback rant but after what has happened in the coal sector over the past few days it is possible Ivan’s a reader, along with other high-flying deal makers.

Tim Treadgold

Last week, in what was a partially correct observation, The Hog suggested “the scene has been set for increased takeover activity in the Australian coal sector”

That remark was based on the friendly takeover of Blackwood Corporation by Cockatoo coal with some of the funding coming from Hong Kong’s Noble Group and some from a Korean company.

While only a valued at $153 million the tie-up between the two small Australian companies is extremely important because it signals a time when savvy investors, such as Noble Group’s Richard Elman, are prepared to restart investing in coal.

Within hours of Elman making his move to create a reasonable business out of Cockatoo and Blackwood Glasenberg plonked $US1 billion on the table to join the coal re-investment game with a deal for Rio Tinto’s Clermont mine in Queensland.

Traditional commodity-trading rivals Elman and Glasenberg are two of the world’s smartest operators with noses finely-tuned to creating value, and with bank accounts big enough to fund them into almost any deal they like.

How interesting that they see coal as a commodity with a bright future, despite the negative political and media comments that continue to dominate commentary on the stuff.

But wait, as the man offering a set of steak knives with whatever product he was touting so famously said on television commercials of 20 years ago, there is more because no sooner had Elman and Glasenberg voted with their cheque books and bought coal assets when others were selling then two more coal-investment deals popped out of the woodwork.

In the US, big private coal miner, Murray Energy agreed to pay $US3.5 billion for coal assets being offloaded by Consol Energy, followed by Turkey’s Yildirim Holdings paying $US450 million for Colombian coal assets of troubled ex-billionaire Eike Batista.

Over the course of a week some $5 billion has been outlaid by people investing in the coal industry.

While most reporting of the deals tended to focus on the “selling” aspect of each transaction it would have been equally correct to focus on the money going in, rather than coming out of coal.

If you start talking about someone “buying” coal a completely different interpretation is valid because rather than it being seen as a rush for the exits by companies such as Rio Tinto and Consol it is more likely to be a rush by others to get set for the coal’s recovery phase after a few dreadful years.

If anyone thinks The Hog is indulging in a bit of PR spin then they are missing the point about the importance of people such as Elman and Glasenberg redirecting part of the investment funds of the companies they run into coal, obviously in the belief that the assets will generate sufficient profit to cover the purchase cost.

What is missing from this improving outlook is a firm understanding of the future trend in coal prices, which is where another piece of evidence adds to the conviction that the worst might indeed be over for coal and that recovery is underway.

In Berlin last week the annual CoalTrans conference produced mixed reports about the mood of the industry with there seeming to be an equal number of pessimists and optimists at the event.

The view The Hog found particularly useful was from Macquarie Equities thermal coal specialist Stefan Ljubisavjevic, who noted in his report that while the “general mood was confused” it was probably “less bearish than had been expected”

While highly detailed and covering every major issue from the threat of increased Chinese exports (mainly from the north Stefan writes, not from the south), to disruption in Colombian supply, and a downward revision in export volumes from the US the point that sits with the coal-recovery thesis is an observation that some delegates are expecting a modest rise in thermal coal prices thanks to improving demand and some potential supply disruptions.

The optimistic delegates were competing with pessimist concerned with the potential damage from over-supply, but the point about price rises sits comfortably alongside the recent burst of fresh investment into the coal sector.

People such as Elman and Glasenberg do not invest unless they are confident of the outcome, and while they are probably getting bargain-basement deals given the number of willing sellers there is a powerful message in the collective $US5 billion that has been invested in coal over the past week.