Mick Davis is ready to make a contrarian bet on thermal coal – by James Wilson and Neil Hume (Financial Times – June 30, 2015)

http://www.ft.com/intl/companies/mining

Mick Davis, former chief executive of Xstrata, knows coal. By the time Xstrata was sold to Glencore in 2013, Mr Davis had turned the miner into the world’s largest exporter of thermal coal, the type used in power stations. Coal lay behind Xstrata’s decade-long record as a corporate success story, riding the commodities boom.

So it is no surprise that Mr Davis could make coal his first deal for X2, the private company he has established with the aim of creating a mid-tier mining group. Having secured equity commitments of up to $5.6bn from investors, X2 is talking to Rio Tinto, the miner with listings in London and Sydney, about acquiring its Australian coal assets in New South Wales.

No deal has been finalised and X2 and Rio both declined to comment, but Mr Davis appears ready to take a contrarian bet on coal.

The commodity has been suffering from a supply glut for years. The price of thermal coal has halved since 2011, and opposition to fossil fuels’ role in contributing to climate-changing carbon dioxide emissions is growing.

But Mr Davis is probably focused on the opportunity to buy coal assets at a low point in the commodities cycle. “It would make sense for this to be the first foray for X2, especially given that a private equity fund should be able to take a long-term view on a commodity that is out of favour,” said analysts at Investec.

Analysts at several firms value Rio’s Australian thermal coal assets at between $900m and $2bn, and there is a plausible long-term rationale for buying them.

Although Japan is no longer the largest importer of thermal coal, its utilities are prepared to pay a premium to the market price to lock in reliable, high quality supplies.

Many Japanese power stations are configured to burn only high-grade Australian coal.

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