Coal mines are at their most affordable for years but only a few cash-flush or state-backed buyers will be able to seize the opportunity.
The commodities boom driven by Chinese and Indian demand pushed coal and mine prices to record highs in 2008.
Since then coal prices have fallen by 60 percent but analysts expect the next commodities boom in 3-5 years time will see an even sharper rise than in 2008.
Buyers complained last year that sellers were over-valuing their assets by up to 50 percent but some still paid the premium.
“Q2, Q3 this year would be a very good time to buy a mine if you’re looking to buy distressed coal assets. Even more so for thermal coal than coking coal,” said Jim Lennon, executive director of commodities and mining research at Macquarie Bank.
“There would be strong interest even from the big miners in buying coal mines which are generating cash, have large reserves, close to ports with good logistics. But everybody is trying to conserve cash now,” said a senior executive at a large mining house. “Raising funds is the rub. There are a lot of non-cash offers.”
The big mining houses such as BHP Billiton, Xstrata, Rio Tinto and Anglo American have cut jobs, cut production and thoroughly reviewed expansion plans. Some, like Rio, have coal mines for sale and debt to service.
Xstrata Plc’s $5.9 billion rights issue, approved on March 2, is a clear example of mining groups’ drive to pay off debt, mining house sources said.
CHINA HAS THE CASH
Unlike the international listed miners, the Chinese and Indian buyers such as China’s biggest coal miner Shenhua Energy an China Datang Corp are driven primarily by a long-term need to secure raw materials supply. Many of them are state-backed and have cash to spend rather than shareholders to placate. They often secure financing on political grounds.
Hong Kong-based bankers say they are matching companies with balance sheet issues with cashed-up buyers.
Indian state entities such as Coal India have been seeking mines in Indonesia, Australia and South Africa for years.
State utilities, Independent Power Producers (IPPs) planning import-fuelled so-called Ultra Mega Power Plants and Indian traders have also sought stakes in overseas mines.
India will import around 51 million tonnes of thermal coal in 2009 mostly from Indonesia, up from 42 million in 2006. This will continue to rise over the next decade as demand grows.
“Indonesia is still wall-to-wall with Indian companies trying to buy smaller coal mines here,” a senior Indonesian coal producing source said.
COLOMBIA, INDONESIA HOT ASSETS
Colombia, one of the world’s largest thermal coal exporters, ships coal prized by European utilities.
Despite the slump in coal prices, Colombian producers have low cash costs and are still making healthy profits.
“If you are looking to buy a mine the first choices would be Colombia and Indonesia,” Macquarie’s Jim Lennon said.
“Colombia is well-positioned to supply the Atlantic and Pacific markets, it has large reserves. Colombia’s government is arguably the world’s most supportive of encouraging coal production,” the senior mining house executive said.
Investors in Colombian mining trust there is legal stability and democracy, said Alberto Escobar, head of Colombian coal producers’ group Fenalcarbon.
Indonesia is the world’s biggest coal exporter. Its chief attraction is its location in the growing Asian market.
Despite that, none of the big international mining houses mine coal there. The top dozen or so exporters are in profit but many small, high-cost mines are ripe for acquisition, producers said. (Reporting by Jackie Cowhig. Additional reporting by Joseph Chaney and Helen Popper)
(c) Reuters 2009. All rights reserved.