Anglo American Seeks Coking Coal Assets in Russia, Mongolia

Anglo American Plc, the third- largest producer of steelmaking coal, is seeking an acquisition that may more than double output to meet rising demand from India and China.

Anglo is looking for assets with potential annual output of as much as 20 million metric tons in Russia, Mongolia, Indonesia and Mozambique, said Seamus French, head of the London-based company’s coking coal business. Anglo’s production of the commodity from its Australian mines was 12.6 million tons last year, according to its website.

“I’d like to be, in the latter half of next year -- by end 2011, be firmly zeroed in on a target,” French said by phone from Brisbane, Australia. “We can double production from our own pipeline by 2020 but we want to do more than that.”

Anglo joins Brazil’s Vale SA, China Shenhua Energy Co. and South Korea’s Posco in seeking coal assets in developing nations after Chinese imports surged fivefold last year and Indian demand rose. Contract prices gained this year as the global economic recovery spurred supply competition between steelmakers in Japan and China.

Anglo considering coking coal acquisitions is “absolutely” a good idea, said Des Kilalea, an analyst at RBC Capital Markets, by phone from London today. “Coking coal is one of those products where demand is probably going to underpin price for some time. It’s probably one of the products with one of the best fundamental price outlooks.”

‘Minimum Scale’

To set up operations outside of Australia, “there is a minimum sort of scale,” French said. “That scale is probably about 10 to 20 million tons per annum, to establish the infrastructure in new regions.”

The company plans to double coking coal production from its Australian mines to 24 million tons by 2020, with output from its Grosvenor and Moranbah South projects in Queensland. Anglo’s Chief Executive Officer Cynthia Carroll is selling zinc and phosphate assets and focusing on resources such as iron ore needed by Asia.

Anglo gained 46 pence, or 1.9 percent, to 2,511 pence at the close of trading at 4:35 p.m. in London.

Vale, the biggest iron ore supplier, is investing $1.3 billion in its Moatize coal mine in Mozambique, while Posco in June agreed to buy a stake in another project in the nation.

‘Right Place’

China Shenhua, the country’s biggest coal producer, BHP and Xstrata Plc are among companies looking to invest in Mongolia’s Tavan Tolgoi coking coal deposit.

Demand for the commodity is forecast to rise 14 percent to 257 million tons in 2010, and 6 percent next year, driven by China and India, UBS AG analyst Tom Price said on July 22.

A coking coal acquisition “in the right place” probably won’t make investors nervous, RBC’s Kilalea said. Anglo, which suspended its dividend in 2009, was criticized for paying about $5.5 billion to acquire the Minas Rio iron-ore assets in Brazil near the peak of a six-year commodities boom in 2008.

“Minas Rio was an expensive acquisition,” Kilalea said. “But it’s a slightly different company in terms of investor perception now.”

Anglo’s debt-to-equity ratio is likely to improve “rapidly, given current commodity prices combined with Anglo’s focus on cost savings and efficiency gains, and an additional kicker from asset sales of close to $2 billion,” Anwaar Wagner, resources fund manager at Old Mutual Investment Group Ltd., said by phone from Cape Town. “Cash flow is likely to improve further when Anglo finishes spending and starts production at its key projects, including Minas Rio.”

Indian Role

India will play a “significant” role for Anglo in the next decade or so, said French. “If you look at data on steel intensity, we all know that Indian steel intensity on a per capita basis is only one-seventh of China.”

Sales to India account for about 25 percent of output, and China takes up less than 10 percent, French said. The business posted sales of $2.2 billion in 2009, about 9 percent of Anglo’s total revenue, according to data compiled by Bloomberg.

India’s steelmaking capacity rose 9.6 percent to 72.8 million tons in the fiscal year ended March 31. Output is likely to reach 115 million tons by March 2012, Steel Minister Virbhadra Singh said in April. Canada’s Teck Resources Ltd. is the world’s second-biggest seaborne supplier of coking coal.

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

Enlarge image

CEO of Anglo Coal Australia Seamus French

Ron D'Raine/Bloomberg News

Seamus French, chief executive officer of Anglo Coal Australia Pty Ltd.

Seamus French, chief executive officer of Anglo Coal Australia Pty Ltd. Photographer: Ron D'Raine/Bloomberg News