Canadian coal mine Grande Cache sold for US$2 amid plunging bulk commodities demand – by Peter Koven (National Post – October 2, 2014)

The National Post is Canada’s second largest national paper.

The value destruction in the bulk commodities business has been astounding in the last few years and no one knows it better than Asian commodity traders Marubeni Corp. and Winsway Enterprises Holdings Ltd.

Back in 2011, they teamed up to buy Canadian miner Grande Cache Coal Corp. for $1-billion. Grande Cache was the only pure-play coal producer left in Western Canada, and the buyers saw an opportunity to secure a big source of supply in a mining-friendly country.

It turns out not to have been such a wise decision. Marubeni and Winsway are now planning to sell their Grande Cache stakes to an Asian coal firm called Up Energy. Unfortunately for their shareholders, the proposed sale price is a bit less than they paid: US$1. Each.

In a coal market as bad as this one, US$2 may not be such a bargain given the problems the buyer is inheriting.

“When you buy a coal company today, the cash outflows don’t stop when you close the deal,” said George Dethlefsen, chief executive of Corsa Coal Corp. “Even if the buyer is paying a dollar, they may need a good amount of money in reserve to sustain the company over the next 12 to 24 months.”

The laughable sale price underscores how miserable conditions are in coal and iron ore, the world’s two key bulk commodities. Prices were flying high three years ago, but have been in steep decline through most of 2014.

That has carried over to the equity markets, where shares of the big U.S. coal producers are all down more than 90% from their 2011 highs. Coal mines in Western Canada have been shuttered, along with iron ore operations in Eastern Canada. The free-falling iron ore price also threatens greenfield iron ore projects in that region.

The bulk commodities are suffering due to uncertain demand in China, and rising supply from mining companies that were counting on much higher prices when they greenlit new mines a few years ago.

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