Cockatoo Coal’s proposed “friendly” acquisition of Blackwood Corporation is a perfect example of two companies seeking to pool their resources to achieve sufficient size to operate their mine assets profitably, and create a business that appeals to investors.
The jury is out as to whether the Cockatoo deal with Blackwood will work as planned. Early signs though are encouraging with the first stages of the complex $153 million recapitalisation process successfully completed.
That major shareholders, SK Networks of Korea and Hong Kong-based Noble Group, have agreed to inject $93 million into the deal, and a group of institutional and professional investors are providing an additional $60 million, is a considerable vote of confidence in the deal itself, and in the future of a promising Australian coal-mining venture.
That final point about the boost to confidence in Australian coal cannot be overstated because for the past few years there has been more money withdrawn from the coal industry than has been injected.
Existing Cockatoo shareholders will have the final say on whether the deal proceeds thanks to a legal requirement that they have to vote on it at an extraordinary meeting. It is hard to imagine opposition though, given they have the chance to either be part of a bigger and successful business, or remain stuck in a small company going nowhere.
Before shareholders vote they will also have a chance to demonstrate whether ordinary investors have rediscovered their appetite for coal thanks to a share purchase plan pitched at what seems to be an attractive 4.5c a share.
If there is a strong uptake of the SPP shares, a second powerful signal will have been sent to the wider coal industry that the worst of the downturn might be over.
Management teams and professional investors will be watching the Cockatoo merger with Blackwood very closely because if it is completed as planned sometime towards the end of the year it could be seen as a template for similar deals.
What investors like about Cockatoo’s plan is the boost to production from the Baralaba mine to a target of 3.5 million tonnes of PCI quality coal, and the use of capital and future profits to fund future expansion through the development of opportunities in the potential projects pipeline.
Watching from the sidelines as the Cockatoo deal takes shape are investors in other coal companies marooned by the twin problems of low coal prices and a shortage of capital, which means they are stuck in a sort of no-man’s land; unable to expand and uncertain whether they would get investor support if they tried.
Everyone associated with coal in Australia understands the problem, and is hoping for a change in commodity and financial market conditions. While The Hog might be guilty of grasping at straws there are signs of improvement.
In Asia, early indications of a coal-price recovery have been detected with stockpiles at Chinese ports said to be declining and commodity analysts, such as ANZ Bank’s Mark Pervan reporting a pickup in coal demand.
“We’re starting to see a decline in Chinese stockpiles at both ports and power plants,” Pervan said. “That’s a good sign for demand.”
The next step in the process, which seems to be underway could be a modest uptick in coal prices that averaged a lowly $US77.06 a tonne for thermal coal shipped out of Newcastle in the September quarter.
Forecasts are for the average price to reclaim the $US80/t mark in this quarter and perhaps rise to $US85/t in 2014. While that is still a relatively low price it does represent a potential 10% increase, which will do wonders for profitability, especially given the benefits of strict cost cutting, which has lowered production costs across the industry.
If those price tips are correct, and if investors profit from the Cockatoo/Blackwood merger, the stage will have been set for other small coal stocks to follow with survival plans being replaced by an opportunity to start growing again.
