A team of Asian buyers is paying $1-billion for Calgary’s Grande Cache Coal Corp GCE-T., betting on steady long-term demand for coal used in steel making despite a recent pullback in production amid growing global economic gloom.
China’s Winsway Coking Coal Holdings Ltd. and Japan’s Marubeni Corp. said Monday they will pay $10 a share in cash for the metallurgical coal producer, a 70-per-cent premium to the miner’s Friday closing price of $5.87 on the Toronto Stock Exchange.
The bid comes just weeks after Grande Cache shares hit a 52-week low of $3.22, around the same time coal prices plummeted nearly 30 per cent to $240 (U.S.) per tonne on uncertainty over slower growth in China, the world’s largest steel maker.
Grande Cache’s stock has been trading below its industry rivals in part because of its higher-cost operations in west-central Alberta. Still, analysts say the bid values the company more in line with its peers.
“We are very pleased to announce this transaction and the considerable value it brings to our shareholders,” said Robert Stan, chief executive officer of Grande Cache.
Hong Kong-listed Winsway supplies imported coal to the Chinese steel industry and is one of Grande Cache’s main customers for the Chinese market. Marubeni is one of the largest trading houses in Japan and has a 40-year history working with Grande Cache, a company which forecasts sales of 2.2 million tons to 2.4 million tons for the year ended March 2012. The company plans to increase production to 3.5 million tonnes by March 31, 2013.
The acquisition suggests demand for coal will remain strong in both Japan and China, the world’s first and second largest importers of the commodity, respectively. China is particularly hungry for steelmaking coal, as it builds out its infrastructure to meet the needs of a population growing both in size and wealth.
While the market is nervous about short-term coal prices, “Japan and China are still going to be the largest consumers of met coal going forward,” noted BMO Nesbitt Burns analyst Meredith Bandy in an interview.
Canada is also a natural market for customers in China, Japan and South Korea, Ms. Bandy noted.
The Grande Cache deal is the latest in a series of coal acquisitions, many of which involve Canadian companies.
Last month, Xstrata PLC paid $40-million to Cline Mining Corp. to buy a metallurgical coal deposit in northeastern British Columbia, while Anglo American acquired the final 25-per-cent stake in its Peace River Coal partnership in the province that it didn’t already own for about $160-million.
Earlier this year, Walter Energy Inc. completed its $3.3-billion deal for Vancouver’s Western Coal Corp.
Internationally, Alpha Natural Resources Inc. bought rival U.S. coal producer Massey Energy Co. in June for $7.1-billion (U.S.), while Peabody Energy Corp. is going it alone in a $5-billion bid for Australia’s Macarthur Coal Ltd. after its European steel maker ArcelorMittal withdrew from what was first a joint offer.
Analysts aren’t expecting a competing bid for Grande Cache, a company said to have been looking for a buyer for a couple of years.
Scotia Capital analyst Jackie Przybylowski said two major players, Xstrata and Anglo American, recently completed acquisitions in B.C., which is “not likely close enough to generate any operating or transportation synergies.”
The Grande Cache deal still needs approval from two-thirds of the company’s shareholders. The proposal also requires approval from a majority of Winsway shareholders, which the company said it already has locked up.
The Asian group buying Grande Cache, which calls itself AcquisitionCo., does have a right to match any potential competing offers. Grande Cache must pay the a $60-million break fee if it accepts another offer, while AcquisitionCo. is subject to a $110-million if it backs out of the agreement.
CHINA’S COMMODITY DEMAND DROPPING
China’s demand for key industrial commodities may have peaked, which could send commodity prices tumbling further if the global economy continues to lose steam, RBC Dominion Securities analysts warn.
RBC suggests keeping a close watch on Chinese demand for such commodities as copper, aluminum and steel, which have eased in recent weeks.
“It would appear that in absolute terms China’s demand for key commodities may be approaching a short-term peak, especially if the economy decelerates further, and will remain important to track over coming months as any downtrend may weigh on commodity prices,” the analysts noted on Monday.
Economic data from September suggests “a further modest decline” in commodities as compared to August, which is in line with the recent slight softening in Chinese economic indicators.
China’s economic growth slowed to 9.1 per cent in the third quarter, compared to 9.7 per cent in the previous three months.
Still, RBC notes demand for commodities still remains near all-time high levels.
It noted growth rates are still positive year-over-year for key commodities such as copper, up nearly 1 per cent, aluminum up 12.6 per cent, iron ore up 12.5 per cent and steel up 10.6 per cent.