Big producers of the coking coal used in steelmaking have remained resolutely skeptical about its prospects, despite a more-than-threefold rise in prices over the past year.
The perfect storm that has driven coking coal's increase from $76.70 a metric ton to $265.50 a ton will soon fade, the biggest producer of the mineral, BHP Billiton Ltd., said this week in London.
Despite a huge number of assets for sale, takeover deals -- the best signal of miners' expectations about future profitability -- have remained lackluster. Vale SA offloaded its Isaac Plains coking coal mine for an equity value of $1 when it was sold last year, and Anglo American Plc's Foxleigh pit raised just $34 million. A larger transaction tipped at $1.5 billion for Anglo American mines in the coal-rich Bowen Basin remains unconsummated 10 months after it was first mooted.
That makes the sale of Peabody Energy Corp.'s Metropolitan mine to South32 Ltd. announced Thursday significant. The colliery south of Sydney will go for $200 million in cash, plus an agreement on profit-sharing if prices exceed agreed levels next year. The first deal on such a scale done in Australia this year, it's a sign the dam holding back transactions may be starting to break.
On the face of it, it doesn't sound like a lot of money. Metropolitan's operating costs are about $80 a ton, and Peabody has agreed to supply Nippon Steel & Sumitomo Metal Corp. at $200 a ton in the fourth quarter. At those rates and Metropolitan's 2 million ton-a-year production rate, the transaction could have paid for itself out of free cash in about 10 months.
Still, the fact a deal is being done at all can be taken as some sort of a baseline for the market. Metropolitan's coal appears to sell at a discount of about 22 percent to contract prices, meaning its $80-a-ton operating costs could have put it into losses at almost any time over the past 18 months until prices spiked in the current quarter. South32's willingness to buy suggests it doesn't expect those conditions to return soon.
There's also the agreed-upon hurdle prices, above which South32 and Peabody will share profits from the colliery. Peabody's U.S. parent remains locked in Chapter 11 bankruptcy proceedings and the cash price for the mine is already above the level of recent deals. The existence of this additional concession is a clue that coal pits are turning into more of a seller's market than they've been recently.
Coking coal faces a long-term threat over the next few decades from the rise of new steelmaking technologies that use more scrap and less carbon. In the shorter term, though, its prospects look far better than thermal coal, the variant used in power stations that accounts for most carbon emissions.
Metropolitan is one of Australia's oldest coal mines -- operating, on and off, since the 1880s. This pit, and the coking coal it contains, may have bought a fresh lease of life.
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