Florida's Walter Energy likes company's assets and access to transportation
A Florida company's $3.3-billion offer for Vancouver's Western Coal looks at first glance to be good news for British Columbia's mining, port and transportation sectors.
Tampa-based Walter Energy and Western announced the offer Thursday: $11.50 in cash and stock per Western share, which was a 59-per-cent premium over Western's 20-day average price on the Toronto Stock Exchange.
Walter also announced a purchase of U.K.-based Audley Capital's 19.8-per-cent stake in Western.
Shares of Western Coal jumped from a $6.99 close on Wednesday to $10.85 -- a 47-per-cent boost -- by the end of trading Thursday in Toronto.
Western said in a news release that it "has agreed to work exclusively with Walter for a period of up to 14 days expiring Dec. 1, 2010."
The deal would be subject to approval by Western shareholders and regulatory authorities.
Western said no definitive agreement had been reached, "and accordingly no assurance can be given that the negotiations between Western and Walter will lead to a transaction that is consistent with Walter's proposal or to any transaction at all."
Western said it will make no further public comment on the proposed deal.
Steelmaking coal is a hot commodity on global markets, with fourth-quarter prices up 62 per cent to $209 a tonne due to demand in Asia.
Walter interim chief executive officer Joe Leonard said in a teleconference that a deal with Western "would be transformational for our company."
Walter's coal assets are located in the Appalachian Mountains while Western's are primarily in northeastern B.C., giving the company access to steel-producing markets in both the Atlantic and Pacific regions.
"We are making this proposal at this time when the world's steel production is expected to grow 50 per cent over the next 10 years," Leonard said.
"China, Brazil, and India will continue to see major growth. These dynamics will lead to increased demand for high quality met[tallurgical] coal, which is fundamentally in short supply worldwide.
"Western Coal is recognized for its high quality met coal, including its hard coking coal and low [-volatility] PCI (or pulverized coal injection) products and when combined with our enhanced geographic footprint, [this] puts us in an ideal position to access these emerging markets."
Western was in serious financial trouble three years ago, when it was at risk of being demoted from the Toronto senior exchange to the TSX Venture -- which caused the share price to drop 70 per cent in a day.
Its recovery was assisted by a deal with Audley European Opportunities Fund.
Ironically, it was a decision by Audley to sell its Western stake to Walter that prompted Walter to make an offer directly to Western and its remaining shareholders for the entire company.
Western's roster of active mines and advanced mine projects and its access to an uncongested transportation network would play a large part in Walter's vision for growth.
The combined company would emerge as the world's largest publicly traded pure play on metallurgical coal, and Walter envisions it growing to 20 million tonnes of capacity for the export market by 2012 -- or seven million tonnes annual in each of the next two years.
Vancouver's Teck Mining and Australia's BHP Billiton are the dominant players in the international export trade for steelmaking coal, but both also produce a wide array of other metal and mineral commodities.
Leonard took note of Western's exceptional access to transportation infrastructure at Prince Rupert's Ridley coal terminal, and the Vancouver company's large coal reserves.CNRail has potentially
enough capacity to haul 40 million tonnes of coal per year along its northern route to Prince Rupert.
Ridley's present annual capacity for coal is 12 million tonnes, but it could expand to 24 million tonnes.
BHP's Australian coal port is operating at capacity, and North American ports are so constrained that U.S. coal shippers are routing their product through Vancouver, where capacity is also limited.
"We believe Western Coal to be an ideal partner for Walter Energy," Leonard said.
"Western is a leading producer of met coal in British Columbia. Their mines in British Columbia serve customers in the Pacific Basin including China, which is now ... importing more than 35 million tonnes of metallurgical coal annually.
Western is "probably the only major producer serving the Pacific metallurgical markets without constrained transportation and port infrastructure issues," he said.
Leonard said the combined benefits of Walter and Western "would make tremendous strategic and financial sense for Walter Energy.
"The transaction would meaningfully diversify both companies' operating and development portfolios and provide new business opportunities which might not be available to either company on a standalone basis."
Some analysts were uncertain about the merits of the deal.
"An almost 60-per-cent premium seems a lot," said Sachin Shah of Capstone Global Markets in New York.
Shah added that since the single largest shareholder, Audley, supports it, "some kind of deal will eventually happen."
Posts
