Published in June 2005 Australian Longwall Magazine

Good times in the Australian coal industry have resulted in a dynamic marketplace for coal suppliers and buyers alike. Mergers and acquisitions (M&A) have markedly increased, ensuring consolidation while limiting the number of entry points into the industry. Activity by offshore end users – particularly China, India and Brazil – has surged, with a marked increase in offshore equity securing positions in Australian coal mines as countries scurry to guarantee supply. Also, greenfield and brownfield projects have taken off – with infrastructure the only factor hindering their progress.

Booming commodity prices, particularly for coking coal, means coal stocks have significantly outperformed the market. For Australian producers, coking coal margins have increased dramatically, with the coal sector outperforming the Australian Stock Exchange All Ordinaries by around 70% over the past five years – and with all of these gains coming in the last 12 months. Simply look at Excel Coal, which floated in April 2004 at $2 and went on to hit a high of $8.66 in March this year.

While coal has shot ahead, increased M&A activity has become a market-wide trend. Generally, the entire M&A market in Australia has continued its upward trend since the low of 2002. According to the ANZ Investment Bank, 2004 saw total deals in the Asia-Pacific region of $US330 billion; on an annualised basis for 2005, Australia is already ahead of that total. Bear in mind, however, that mining represents only 4% of total M&A activity, and coal only 20% of that 4%.

According to ANZ M&A associate director David Wood, limited access to quality coking coal has produced spirited bidding for spot prices - a key driver linking coal offtake with an equity investment. The gold price in nominal Australian dollars has increased by 30% over the past five years, while the coking coal price has increased by around 110%. Higher profits had lead to the coal sector’s increased attractiveness, and this, together with increased interest from offshore parties, were key drivers in M&A activity, Wood said.

The most recent, and certainly high profile, M&A transaction in Australia involving an underground mine has been the Austral Coal and Centennial Coal merger. Centennial now controls the Tahmoor longwall in New South Wales, giving it significant exposure to the sought-after coking coal market.

Other M&A activity of late includes the acquisition by First Reserve of 50% of AMCI, Excel Coal’s acquisition of the Millennium coking coal project, the acquisition by Felix of 80% of the Ashton coal mine and 100% of the Moolarben coal development project, Yanzhou Coal Mining’s acquisition of Gympie Gold’s Southland longwall, and the move by JFE, Posco and Nippon Steel to each acquire 5% in the Carborough Downs and Glennies Creek mines, with related coal off-take agreements.

Consolidation in the industry means that sizeable opportunities for the majors are now limited - many of the remaining listed coal producers have a major or blocking shareholder. Opportunities for juniors still exist, though. “Most juniors can move much faster and be more nimble than a major in securing new property and taking small- to medium-size greenfield opportunities into the development phase,” Wood said.

ANZ predicts even more activity from end users. There has been a significant increase in interest in equity positions in Australian coal mines from Indian companies. There has also been increased interest from China and Brazil, with several major groups from these regions recently establishing offices in Australia to source new opportunities, Wood said.

“With China becoming a net importer of coking coal and this set to escalate at least for the next few years, this, together with import growth from India and Brazil and other developing countries, means increased competition for feedstock. One would expect this competition for supply to manifest itself in further equity/offtake deals,” he said.

Australia also remains a favoured investment destination for the quality of assets (geology, good quality coal and productive mines) and Australia’s foreign investment-friendly regulatory regime. Other countries are either too far away (Canada and the USA have higher freight costs to India) or do not have sophisticated regulatory regimes or infrastructure (Russia and the Ukraine).

One example of long-term contracts being bound up with coal equity is the recent acquisition by JFE, Posco and Nippon Steel of an equity stake in Carborough Downs and Glennies Creek mines with linked coal offtake agreements for over 10 years of production. “This is a well trodden path, particularly by the Japanese and the Koreans. However, as steel groups from other regions look for additional certainty of coking coal supply, we expect more agreements of this type,” Wood said.