When Excel Coal announced in July that it had received a $A1.83 billion takeover offer from US coal major Peabody Coal and that its board was backing the move, one question remained. Which other Australian coal producers could be next?
In reality, there are not that many. The Australian coal industry is dominated by global majors BHP Billiton, Rio Tinto and Xstrata. Step down one tier and the main companies in the frame are Centennial Coal, Macarthur Coal, Gloucester Coal, New Hope Coal and Felix Resources. The only other real mid-tier coal player is Queensland’s Curragh operation but that is owned by diversified industrial and energy player Wesfarmers.
Peabody’s takeover of Excel now looks pretty much assured after Peabody upped its bid to $9.50 per share and took control of 19.99% of Excel last week. The higher bid came after a second bidder, widely rumoured to be Anglo American, launched a last-minute offer for the company.
Excel’s future projects and mines in New South Wales and Queensland are expected to allow Excel to produce 20 million tonnes by 2008. Excel produced 5.7Mt in 2005.
The Excel deal gives Peabody, which lays claim to being the world’s largest private sector coal company, further access to Australian coal. It owns majority interests in 31 coal mines throughout all major US coal-producing regions.
Peabody has operated in Australia since 1962 and its five Australian operations are based in Queensland.
This latest acquisition raises the question of which companies are most likely to be in purchasers’ sights.
Probably the next most likely takeover target is Macarthur Coal. It has interests in two opencut coal mines – the Coppabella and Moorvale mines, both in Queensland. It also plans to develop up to five new mines by 2010, with a priority on the higher value coking coal – that analysts rate as similar to Excel Coal’s Millennium mine product.
Macarthur also has a niche in its pulverised coal injection product. PCI is typically fed into blast furnaces used in steelmaking.
Another benefit to Macarthur is that it is in Queensland and away from a number of the regulatory restrictions faced by coal producers in Australia’s other major coal-producing region, the Hunter Valley.
Analysts rate Macarthur as having a similar asking price to Excel, which would mean a payday in the hundreds of millions for Macarthur managing director Ken Talbot. Talbot is Macarthur’s largest shareholder with a stake of just over 36% of the company’s listed capital.
According to an ABN Amro advisory to its clients, Felix Resources is also a potential takeover target. It has a similar production expansion profile to Excel and boasts a diverse mix of thermal, semi-soft and PCI products. Its price of about $2.70 makes it a relatively affordable takeover target.
Centennial Coal is also on a par with Excel and Macarthur size-wise but has had a poor recent operational track record, a relatively weak balance sheet (in comparison to some of the others) and domestic sales commitments to power producers that could deter some potential purchasers. However, it does have scale and the hard coking coal from its Tahmoor operation has the potential to bring good returns.
New Hope Coal, according to analysts, remains one of Australia’s lowest-cost producers with a price of about $40 a tonne. That price reflects low strip rations and its ownership of a coal loading facility. The company is wholly a thermal coal producer but does own some prospective coking coal tenements in the Bowen Basin.
Gloucester Coal recently extended its mine life out to 2030 and with its reasonable quality coking coal and strong balance sheet seems sure to attract interest. However, there is a feeling that it may be too small to attract bigger predators.
Stock Resources joint managing director Stephen Bartrop said Macarthur loomed as one of the most likely takeover targets. “It would give Ken [Talbot] an opportunity to exit,” he said. “The Excel story is telling him that maybe coal prices have peaked and that it’s a story of sustainability of earnings.
“Xstrata would be interested in Centennial. They were interested in its power coal assets. There’s no doubt Xstrata is keen. But they are also playing their Falconbridge hand at the moment.”
Goldman Sachs JBWere analyst Neill Goodwall rated Felix, Centennial and Macarthur as potential takeover targets. “They all have their ups and downs,” he said. But he balked at nominating which of those three would be next off the block.
Vertex Capital Management chief investment officer Kim Ivey said the type of coal contracts each company held added some complexity to the takeover equation. “Whether the contracts are long duration makes a difference,” he said.
“Also the profitability of some of the companies such as Gloucester, Centennial and Macarthur is different to what Excel had. The way I understand it the principals involved at Excel had contracts that could be assumed by Peabody. Do the other players have contracts that can be similarly taken over?
“Centennial is a combination of coking and steaming coal. They are trading at single-digit cashflow multiples. They have quite a bit of free cash flow they can use to buy back shares. The dividends are reasonably high. You just have to hope they can get over their operational problems.
“The market cap for Centennial is a little over $1 billion. Macarthur is a bit similar at $930 million. Felix Resources is at $348 million and Gloucester is at $282 million.”
Fat Prophets senior resources analyst Gavin Wendt said there was a positive outlook for coal and the energy sector in general, something that could easily add fuel to any takeover speculation fires. He is one of the analysts who have been particularly critical of the price for Excel.
Wendt said Macarthur would have to be one of the most obvious takeover targets. “They have quite a niche with PCI and they have growth potential too,” he said. “With Ken Talbot holding a major stake, I don’t think they will be taking any low-ball bids for Macarthur.
“Centennial may not be as attractive because of its thermal coal.”
Adapted from an Australia’s Mining Monthly Magazine article
