LAUNCESTON, Australia, Dec 11 (Reuters) – If you were looking for a sign that coal prices have finally bottomed out, then the ramping up of merger and acquisition activity is often a good indicator.
Just as major mining companies tend to buy assets at inflated prices at the zenith of the market, they tend to sell them at discounts at the nadir.
In the past few days, a flurry of announcements have hit the headlines, including Anglo American’s proposed sale of coal assets in Australia and South Africa, and Peabody Energy and Glencore agreeing to form a joint venture at neighbouring mines in Australia’s Hunter Valley basin.
The M&A activity hasn’t been limited to Australia and South Africa, with Brazil’s Vale selling a stake in its Mozambique mine to Japan’s Mitsui, and Consol Energy saying it plans to pursue an initial public offering of some of its U.S. thermal and coking coal assets.
Companies tend to use obfuscatory language in the announcements of these deals, often resorting to terms such as “unlocking shareholder value” or “maximising synergies,” but behind the spin is often the simple message that the assets are loss-making and the pain on the bottom line has become too much to bear, or if they are profitable, they aren’t providing enough of a return on capital.
Selling loss-making coal mines can provide some short-term relief to a company’s balance sheet, even if the management of the firm believes in the longer-term story of the asset.
Witness Rio Tinto’s decision this year to sell its Mozambique coal mines for a token $50 million, having paid $4 billion in 2011 to gain a foothold in what was then seen as one of the world’s most promising undeveloped coal basins.
Rio Tinto bought at the top of the market, with the spot price of thermal coal at Australia’s Newcastle Port , an Asian benchmark, peaking at $136.30 a tonne in January 2011 and metallurgical coal reaching a record around $330 in the middle of that year.
Since then, Newcastle coal has steadily declined, reaching a 5-1/2 year low of $62.25 a tonne last week, a drop of 74 percent since the 2011 high, while metallurgical coal has slumped by about two-thirds to around $110.
Ultimately Rio Tinto’s management took the view that spending more cash to develop the necessary infrastructure to scale up its Mozambique operations made little sense at a time of sustained low prices, even if the company believes in the longer-term demand outlook.
It’s worth noting that Rio Tinto is adamant that its mines in Australia aren’t up for sale, and it has been cool to suggestions that Glencore’s proposed merger of the two mining giants would be especially good for the coal assets.
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