Coking coal merger and acquisition (M&A) trends

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- M&A history
- Trends
- Outlook

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Emily Medine, Principal, ENERGY VENTURES ANALYSIS INC

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Coking coal merger and acquisition (M&A) trends

  1. 1. PROSPECTS FOR U.S. METALLURGICAL COAL M&AEnergy Ventures Analysis1901 N. Moore St. Arlington, VA 22209(703) 276 8900 www.evainc.com
  2. 2. World Coking Coal Trade, 2009 (Million Tonnes) N. America S. America Europe/Med Asia Other Total Canada 1.1 1.2 3.5 14.9 0.8 21.4 United States 2.7 7.2 18.9 5.0 0.0 33.8 North America 3.8 8.4 22.3 19.9 0.8 55.2 Colombia 0.0 0.0 0.1 0.0 0.0 0.1 Venezuela 0.0 0.0 0.0 0.0 0.0 0.0 South America 0.0 0.0 0.1 0.0 0.0 0.1 Australia 0.5 4.8 18.1 97.5 4.4 125.2 China 0.0 0.0 0.2 1.2 0.0 1.5 Indonesia 0.0 0.0 0.1 29.4 0.0 29.5 Vietnam 0.0 0.0 0.0 0.0 2.0 2.0 Pacific 0.5 4.8 18.4 128.2 6.4 158.2 Poland 0.0 0.0 1.7 0.0 0.0 1.7 Russia 0.0 0.0 3.3 2.8 0.5 6.5 Europe 0.0 0.0 5.0 2.8 0.5 8.2 South Africa 0.0 0.0 0.5 0.1 0.0 0.6 Africa 0.0 0.0 0.5 0.1 0.0 0.6 TOTAL 4.3 13.2 46.3 150.9 7.7 222.3 Source: International Energy Agency, Coal Information 2010 World coking coal trade was strong in 2009 due to growth in Asia. Australia accounts for over 50% of exports. U.S. was a distant second. second 2
  3. 3. U.S. Metallurgical Coal Exports (1,000 Tons) 6,000 Other Canada Asia Europe 5,000 4,000 3,000 2,000 1,000 0 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Metallurgical coal exports have more than rebounded primarily due to the growth in exports to Asia. 3
  4. 4. U.S. Met Coal Exports (1,000 Tons) 70,000 60,000 Asia Canada 50,000 Europe South America 40,000 30,000 20,000 10,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 is annualized from YTD data On an annualized basis, metallurgical coal exports are approaching 60 million tons for 2010, about double 2009 levels. 4
  5. 5. Australian Benchmark Prices (USD/Tonne) Annual Prices Quarterly Prices Quality Brand Apr-07 Apr-08 Apr-09 Apr-09 Jul-10 Oct-10 Hard Peak Downs $98.00 $300.00 $129.00 $200.00 $225.00 $209.00 Hard Goonyella $96.00 $300.00 $128.00 $205.00 Hard Norwich Park $90.00 $290.00 $120.00 $215.00 $195.00 Hard Gregory $85.00 $285.00 $115.00 $210.00 $190.00 PCI $64.00 $250.00 $90.00 $170.00 $180.00 $147.00 Semi-soft $64.00 $240.00 $80.00 $167.00 $172.00  Pricing is strong but has not returned to levels experienced in mid-2008.  The primary reasons for more modest pricing are increased supply, lower freight, and softer market for thermal coals which has allowed a significant amount of crossover production. 5
  6. 6. Average Metallurgical Coal Price (USD/Ton FOB Loadport) $200 Southeast Atlantic $175 Mobile $150 $125 $100 $75 $50 $25 $0 Jan-05 Apr-05 Jul-05 Jan-06 Apr-06 Jul-06 Jan-07 Apr-07 Jul-07 Jan-08 Apr-08 Jul-08 Jan-09 Apr-09 Jul-09 Jan-10 Apr-10 Jul-10 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Average price for U.S. metallurgical coals has rebounded. 6
  7. 7. Thermal Coal Pricing – NYMEX Vs ARA $150 $125 Spread ARA v NYMEX $100 NYMEX 12,000 Btu $75 $50 U.S. CAPP coals competitive $25 $0 ($25) Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 When spread between ARA price and CAPP coal is large enough, CAPP coal can compete in global market. Not quite there. 7
  8. 8. U.S. Met Coal M&A Activity Primary Production Business Price (MMTons) Buyer Location Acquisition Completion (USD Millions) (Year) Arcelor Mittal Luxembourg Mid Vol (CAPP) 23-June-08 491 3.5 (2007) Arcelor Mittal Luxembourg Concept Group (CAPP) 21-Aug-08 166 0.8 (2007) OAO Severstall Russia PBS Coal (NAPP) Nov-08 876.8 2.6 (FY07/08) Metinvest Ukraine United Coal (CAPP) 30-Apr-09 NA 5.1 (2008) Mechel OAO Russia Bluestone (CAPP) May-09 436 2.5 (2008) Massey Energy U.S. Cumberland Resources 10-Apr-10 640 cash/320 stock) 8.1 (2009) (CAPP) Essar Minerals India Trinity Coal (CAPP) May-10 600 7.3 (2009) Cliffs U.S. INR Energy (CAPP) Aug-10 757 1.3 (2009) • Big deals in 2008 and 2009 were low and mid vol deals with international companies. • Big deals in 2010 were high vol deals, with both U.S. and foreign buyers. 8
  9. 9. 2010 Deals Reserves 2009 Production (Million Tons) (Million Tons) Buyer Seller Steam Met Steam Met Cliffs INR 51 68 0.9 0.5 Essar Trinity 100 100 6.9 0.4 Massey Cumberland 200 216 7.1 0.8  Numbers are EVA estimates derived from press reports.  All three producers were primarily steam coal producers with more metallurgical coal opportunity than sales.  Valuations driven (in part) by metallurgical coal opportunity. 9
  10. 10. Acquisition Announcements Show Met Coal Intent Essar stated that Trinity Coal will be an excellent addition to its North American business, ensuring that it becomes an integrated player in the region. Massey expects to be able to produce approximately 5.0 million tons of metallurgical quality coal annually with the existing Cumberland assets. Current production is 800,000 tons. Cliffs indicates that INR production is expected to shift to increased metallurgical coal production going from 50/50 to 65/35. 10
  11. 11. Cliffs Acquisition of INR 2011 Projections 2012 Projections MMton $/ton MM MMton $/ton MM Met Committed 0.2 $100.00 $20.0 0.0 $100.00 $0.0 Uncommitted 1.5 $140.00 $210.0 2.3 $140.00 $318.5 Steam Committed 0.5 $66.00 $33.0 0.0 $66.00 $0.0 Uncommitted 0.7 $75.00 $52.5 1.2 $75.00 $91.9 TOTAL 2.9 $108.79 $315.5 3.5 $117.25 $410.4 Costs @ $70/Ton 2.9 $70.00 $203.0 3.5 $70.00 $245.0 EBITDA $38.79 $112.5 $47.25 $165.4 Purchase Price $757.0 $757.0 Multiple (Purchase Price/EBITDA) 6.7 4.6 • Cliffs shared its acquisition assumptions • The payment assumed market met coal prices of $140/ton and market steam coal prices of $75/ton. 11
  12. 12. Cliffs Financial Performance (USD/Ton) 160 Operating Margin $144.65 140 $95.34 $93.77 120 $96.50 $104.38 $91.67 Sales $90.64 100 Price 80 $134.00 $129.41 $117.20 $106.95 $102.72 60 $96.94 $86.90 Cash 40 Costs 20 0 (20) (40) 2Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 • Large improvement in performance not due to INR which just occurred in Q2. • Improvement due to solid operations at Pinnacle and Oak Grove and better pricing. • Q3/Q4 2010 unlikely to be as good with reported operating problems at Pinnacle. 12
  13. 13. Cliffs 2010 Guidance Budget September Guidance Steam Met Steam Met Million Tons 0.4 4.1 0.4 3.5 Price ($/Ton) $140-$145 $115-$120 Cost ($/Ton) $110-$115 $115-$120  Problems at Pinnacle are expected to impair Q4 production  Costs include DDA and INR acquisition costs  Increase in costs combined with decline in price will impair annual performance.  Too early to tell if INR acquisition will prove out. 13
  14. 14. U.S. Metallurgical Coal Production Public Coal Steel Private 100% 80% 60% 40% 20% 0% NAPP CAPP SAPP Low/Mid High/PCI Total  Most metallurgical coals are produced by publicly- traded coal companies.  Some owned by steel companies.  Little production is currently privately owned 14
  15. 15. Public Coal Company Ownership 2009 Met Coal (Million Tons) Production by Region Production by Quality Company NAPP CAPP SAPP Low/Mid High/PCI Total Alliance Resource 0.3 0.2 0.3 0.2 0.5 Alpha 0.5 5.7 1.7 4.5 6.2 Arch 2.0 2.0 2.0 Cliffs 0.9 0.9 1.7 1.7 INR Energy (Cliffs) 0.4 0.4 0.4 Consol Energy 2.1 2.1 2.1 ICG 0.3 0.8 0.7 0.4 1.1 Massey 7.4 0.2 7.2 7.4 Cumberland (Massey) 0.8 0.8 0.8 Patriot Coal 5.4 5.4 5.4 Rhino Energy 0.5 0.5 0.5 TECO Coal 2.6 2.6 2.6 Walter Energy 6.1 6.1 6.1 Western Coal 0.3 0.3 0.3 PUBLIC TOTAL 1.1 29.0 7.0 12.8 24.2 37.0 Market Share 45% 73% 81% 59% 84% 73% Four largest companies (Massey, Walter, Alpha and Patriot) account for 70% of production. 15
  16. 16. Steel Company Ownership 2009 Met Coal (Million Tons) Production by Region Production by Quality Company NAPP CAPP SAPP Low/Mid High/PCI Total ArcelorMittal (Concept) 2.5 2.5 2.5 Sun Coke 1.1 1.1 1.1 Mechel (Bluestone) 2.0 1.9 0.1 2.0 Severstal (PBS) 0.9 0.9 0.9 Essar Steel (Trinity) 0.4 0.4 0.4 Metinvest (United Coal) 0.5 2.0 0.7 1.8 2.4 STEEL TOTAL 0.5 8.8 0.0 5.9 3.4 9.3 With the exception of Sun, these are the new entrants into U.S. met coal. Jury is still out on whether these were good deals. 16
  17. 17. Privately-Held Metallurgical Coal Production 2009 Met Coal (Million Tons) Production by Region Production by Quality Company NAPP CAPP SAPP Low/Mid High/PCI Total Classic Coal 0.4 0.4 0.4 Drummond 1.6 1.6 1.6 Int. Resource Partners 0.8 0.8 0.8 New River Coal 0.7 0.7 0.7 Rosebud Mining 0.8 0.4 0.4 0.8 PRIVATE TOTAL 0.8 1.9 1.6 3.1 1.2 4.3  Drummond is the largest. Drummond’s Colombia operation is for sale. Not clear if Alabama is also in play.  Remaining producers are all sub 1.0 million tons per year. 17
  18. 18. Idle Properties  Many metallurgical coal mines were shut following collapse of the traditional steel industry in the early 1980’s.  Some may present M&A opportunities if there are sufficient remaining reserves and/or mine infrastructure.  Some examples – New Elk Mine in Colorado – New Vision Energy in East Kentucky – Atlantic Leasing in Pennsylvania 18
  19. 19. Cline Mining Corporation  From 1952 until the 1980’s, CF&I Steel Company produced coking coal from the Allen and Maxwell mines near Trinidad, Colorado for its blast furnace operations  The mine was idled when the coke ovens were closed.  In 2008, Cline Mining Corporation acquired New Elk Coal Mine for US$16.6 million. 19
  20. 20. Cline Mining Corporation - Project Economics Source: Cline Mining Corporation, September 2010 Huge payout if it works. Issues are costs, pricing, terminal, and quality. 20
  21. 21. Others  New Vision Energy, LLC (NVE) – Price Project – Old Wheelwright Mining’s Inland Steel Property, Idled in February 1991 – NVE leased property in 2006. Many of the remaining reserves contain coal that is suitable for the PCI market. – Projected 2011 production is 1.2 million tons  Mon View Mining – Mathies Mine – Massey bought idled Mathies Mine and related assets out of bankruptcy court. – “This acquisition is particularly exciting as it provides additional metallurgical coal reserves …” – Mine last produced coal in 2001. 21
  22. 22. Largest Growth is in Organic Projects  Virtually every coal company in Appalachia is focused on expanding metallurgical coal presence through development of owned/leased reserves.  Examples include: – ICG at Tygart River 1 – Mechel plans to increase Bluestone’s production to 7.0 million tonnes over next three years – Metinvest plans to ultimately triple United’s metallurgical coal production – Walter plans to increase production from No. 4 and No. 7 longwalls to 9.5 million tons per year. 22
  23. 23. Sustainability of Met Coal Operations in the U.S.  Market – Domestic market is inadequate to absorb large and/or growing volumes. Coking capacity is expected to decline. – Export market depends upon global demand growth and willingness to accept marginal U.S. metallurgical coals.  Ability to produce – Production situation in Central Appalachia is more than challenging. – Not clear whether new mines can be permitted.  Competitiveness – U.S. coals need high prices to compete in global market – U.S. coals at a freight disadvantage – Weak U.S. dollar has contributed to U.S. coal competitiveness. Can this be assumed to continue? 23
  24. 24. U.S. Dollars to One Australian Dollar $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 The relationship between US dollar and Australian dollar is key with Australia being the largest exporter and coal trade US dollar-denominated. denominated 24
  25. 25. Significance of the Exchange Rate US$ per A$ Price in A$ 0.95 0.80 Difference 100 95.00 80.00 15.00 150 142.50 120.00 22.50 200 190.00 160.00 30.00 250 237.50 200.00 37.50 With Australian coal setting the market price, the difference in world coal price at different exchange rates is huge. 25
  26. 26. $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 $0.80 $0.90 Jan-96 $1.00 Jul-96 Jan-97 Jul-97 Jan-98 Remember LAXT? Jul-98 Jan-99 Jul-99 Jan-00 LAXT Jul-00 commitment Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 LAXT closed Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-1026
  27. 27. Central Appalachia Production Costs Remain High $180.00 $166.48 Sales Price Operating Margin $160.00 $149.38 Cash Costs $144.65 $140.00 $120.00 $96.88 $85.98 $100.00 $86.20 $83.58 $85.49 $73.96 $73.04 $75.24 $72.28 $80.00 $70.45 $60.00 $96.94 $79.78 $40.00 $69.72 $68.94 $67.75 $65.90 $63.61 $60.14 $59.51 $58.82 $57.49 $49.19 $48.01 $20.00 $0.00 Consol Arch ICG Alliance Massey Patriot Xinergy James TECO Western Walter National Cliffs River 27
  28. 28. Global Competition  Australia has been and continues to be the primary source of metallurgical coal into global market.  Two unknowns in Australia – Can port capacity keep up with growth. (probably yes) – Will new taxes on coal mining deter mine investment. (unclear)  Non-traditional sources – Mongolia will be strong producer but to Chinese market. – Mozambique is looking promising but will require enormous infrastructure development. 28
  29. 29. Conclusions  Met coal M&A opportunities of any size in U.S. are limited. – Only a few private companies remain – Sale of some publicly-traded coal company assets could occur (e.g., Consol selling met coal reserves) – Decision by steel companies to divest (again)  Smaller opportunities exist – Idled/closed properties – Reserve pockets which have not been developed 29
  30. 30. Thank You Questions Emily Medine emedine@evainc.com 412-421-2390 30

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