New Hope Proves Exception to Coal Deals Returning Dust: Real M&A

After every coal-mining deal this year left the buyers with losses, Australia’s New Hope Corp. is still managing to attract multiple takeover offers that would lead to a record payoff.

New Hope surged to an all-time high yesterday after getting proposals to acquire the thermal coal producer from unidentified bidders. The company may be worth A$5.8 billion ($5.6 billion), Bell Potter Securities Ltd. said, implying a takeover at 27 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That would top the record price paid by Alpha Natural Resources Inc., which plunged 66 percent since agreeing to buy Massey Energy Co.

While coal-mining takeovers this year have contributed to declines of at least 35 percent for acquirers as slowing economic growth in the U.S. and Europe depressed prices for coal used in steelmaking, New Hope is profiting as demand from power producers in China increases. New Hope, which also owns a port used to export coal, may attract interest from BHP Billiton Ltd. and Rio Tinto Group, according to Ord Minnett Ltd., as well as energy suppliers in Japan, which is facing a power shortage after the worst nuclear disaster in a quarter century.

“This deal is more attractive than the other coal deals that we’ve seen this year,” Rick de los Reyes, who manages $800 million at T. Rowe Price Group Inc.’s Global Metals and Mining Fund in Baltimore, said in a telephone interview. “The fact that Australia is close to China, that China went from being a net exporter to a net importer of thermal coal and that New Hope has that port capacity, that’s huge.”

Shareholder Value

New Hope declined to comment, according to an e-mailed statement. Based in Ipswich in Australia’s northeastern state of Queensland, New Hope owns the Acland mine that supplies thermal coal, used in power plants to generate electricity.

The company advanced 15 percent to a record A$6.10 a share yesterday after it said in a statement that it started a formal process for potential bidders.

New Hope, which said it had already received a number of preliminary proposals, will invite selected groups to submit offers to the board. It will “determine whether a proposal for New Hope is available at a price, and on terms, that are in the best interests of all its shareholders,” the company said.

Chairman Robert Millner declined to identify the bidders in a telephone interview yesterday and said that New Hope isn’t currently in talks with any of them.

Coal Acquisitions

The mining company, which has no debt and A$1.67 billion in cash, may be worth A$5.8 billion or more, Angus Aitken, a broker at Bell Potter in Sydney, said in an e-mailed comment.

That would give New Hope an enterprise value, or the sum of its equity and debt minus cash of A$4.18 billion, data compiled by Bloomberg show. That equals about 27 times the company’s A$155 million in Ebitda, the data show.

A takeover at that price would surpass the 25.2 times Ebitda that Alpha Natural agreed to spend for Massey in the richest deal in the coal-mining industry for targets worth more than $1 billion, according to data compiled by Bloomberg.

Since the Massey takeover was announced in January, Abingdon, Virginia-based Alpha Natural has lost two-thirds of its value as the biggest loser in the Standard & Poor’s 500 Index, the benchmark gauge for American common equity.

The deal contributed to almost all of Alpha Natural’s 67 percent drop this year, data compiled by Bloomberg show.

Overall, the six buyers involved in the four coal-mining acquisitions worth more than $1 billion in 2011 have on average lost about half their market value this year.

China Demand

While companies such as Alpha Natural and Peabody Energy Corp. have declined as concern over slowdowns in the U.S. and Europe pushed down prices for steelmaking coal from a record, Credit Suisse Group AG estimates that the cost to buy thermal coal will increase in the next two years.

Helped by rising demand in China and India as the world’s fastest-growing major economies produce more electricity, thermal coal may rise as high as $138 a metric ton by 2013, Credit Suisse said in a report on Oct. 4. The benchmark Asian price for thermal coal was $122.25 a metric ton in the week ended Sept. 30, according to IHS McCloskey, a Petersfield, England-based data provider. Prices reached a peak of $130.85 a ton in March, the data show.

“Whoever’s planning on buying New Hope, they’re basically trying to buy assets in their backyard to feed China,” Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist for Tullett Prebon Plc, said in a telephone interview.

Port Ownership

That may help make New Hope, which owns a port that can ship coal to Asia, more attractive than other coal companies acquired this year, according to T. Rowe’s de los Reyes.

Coal mining companies that use shared ports such as the one in Newcastle, Australia, the biggest export harbor for thermal coal, have faced delays as ships are forced to wait offshore to access loading facilities when demand increases. More than 95 percent of shipping volume in Australia is handled in 20 of the nation’s more than 60 ports, according to the National Transport Commission’s most recent report from December 2010.

“Companies are looking at New Hope to build capacity, to control capacity, so they can export to what they’re perceiving as a future United States -- China,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.3 billion, said in a telephone interview.

The quality of New Hope’s assets and its plans to double production at the Acland mine to 10 million metric tons may entice Japanese power producers, as well as Melbourne-based BHP and Rio Tinto of London, Peter Arden, senior equity analyst at Ord Minnett in Melbourne, said in a telephone interview.

Potential Buyers

New Hope, 11 percent owned by Tokyo-based Mitsubishi Materials Corp., controls the Acland mine that may be worth A$3 billion, he said.

Samantha Stevens, a Melbourne-based spokeswoman for BHP Billiton, declined to comment. Karen Halbert, a Melbourne-based spokeswoman for Rio Tinto, said the company doesn’t comment on market speculation.

Japan was hit by rolling blackouts after a magnitude-9 earthquake and subsequent tsunami on March 11 knocked out power and disabled back-up generators at Tokyo Electric Power Co.’s Fukushima plant, leading to explosions and radiation leaks. Then-Prime Minister Naoto Kan called for the nation to end its reliance on atomic energy and imposed the first mandatory power savings since the 1970s. Nuclear energy provided about 30 percent of Japan’s electricity before the crisis.

Mining companies in China may also be among the potential buyers of New Hope as the nation tries to secure supplies of the fuel, Stewart Capital and Platypus Asset Management Ltd. said.

“New Hope is attractive because they have their own infrastructure, the port, making it highly strategic,” Prasad Patkar, who helps manage $1.1 billion at Platypus Asset in Sydney, said in a telephone interview. “Coal has very, very, serious strategic appeal. You could get a variety of buyers.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE