Smaller Coal producers with backyard mines await shift in demand, pricesFeb 09 - Pittsburgh Tribune-Review (PA)They are deals Appalachian coal companies are betting will pay off when better days at the market arrive: mines at a fraction of the cost, ready for production, right in the backyard. Smaller companies are taking advantage of a seven-year low in coal prices and tepid demand by buying the mines of their debt-laden corporate competitors. It's a trend analysts say will continue through the year as the tough market continues to pinch. "Without a doubt over the past two years (mergers and acquisitions activity) has shifted from very large consolidation from primary public producers to private producers opportunistically buying assets that really fit their footprint," said Ted O'Brien , CEO of Doyle Trading Consultants , a New York City firm that provides market analysis on the coal industry. Weak demand and low prices for coal have hurt producers. A depressed international market, due in part to an abundance of Australian coal and decreased demand from China , has exacerbated pressures caused by a push to reduce carbon emissions from U.S. coal-fired power plants. Four mine sales in Western Pennsylvania and West Virginia and more nationwide over the past two years highlight a consolidation pattern based on geographic proximity. Companies can reap revenue from acquiring and mining nearby coal without having to expend additional resources on administrative overhead or infrastructure. "The addition ... has provided us with a larger production and reserve base," said Gary Broadbent , spokesman for Murray Energy, based in St. Clairsville, Ohio . Murray added five underground mines from Consol Energy to its coal arsenal in northern West Virginia for $3.5 billion in 2013. "This allows us to better to serve our electric utility customers and more operational flexibility." At the height of the coal market in 2011, large public companies like Alpha Natural Resources , which 10 sold mines to Kittanning's Rosebud Mining Co. for $86 million last year, took on debt to fund new projects. "There is a breaking point, and I think you're starting to see those cracks now," said Jim Thompson , director of IHS Coal and a coal markets expert. Now with interest and debt payments due, companies need cash, making it a buyer's market, O'Brien said. "Private producers that didn't have the same debt overhang that are very familiar with the coal asset and have a long-term view for coal, they stepped up to opportunistically grow their production base," he said. The long view was Corsa Coal's focus, said George Dethfelsen, the company's CEO. The company, based in Toronto , bought PBS Coals Ltd. , which included three mines, for $60 million in 2014, about 10 percent of what its former parent company, OAO Severstal, paid for it in 2008, Dethfelsen said. "We would rather buy things at the trough than at the peak," he said. "Over time it's an asset that's going to prove quite valuable once the market recovers and we can dramatically increase our production." Corsa Coal is a public company, though a private equity firm owns the majority of its shares. Its small size helps it weather prolonged low prices, Dethfelsen said. Last month the company said it will idle two Somerset County mines it bought last summer and may lay off 130 workers. Dethfelsen defends the purchase and says Corsa Coal's purchases will pay off. "We don't have union liabilities. We don't have an over-leveraged balance sheet," he said. "I think our investment is not going to be judged on one year or two years. We take a multiyear outlook on any company we buy." Being private also has advantages in today's tough market, said Broadbent, the Murray spokesman. " Murray Energy Corp.'s advantage as a private company is that we can quickly make decisions, we can take on fights which public companies fear, and we can focus on exclusively what matters, i.e., mining coal as safely and as efficiently as possible," he said. Private companies in Appalachia may enjoy an advantage because they are less pressured to deliver profits quarterly, said Thompson, the IHS Coal researcher. "Miners may be able to be strategic and less tactical in their decisions," he said. Other sales include Cliffs Natural Resources , the country's largest iron ore company, based in Cleveland , which sold its mines in West Virginia to Coronado Coal II LLC for $175 million last month. Coronado Coal, which is partly financed by a private equity firm, also bought mining companies Greenbrier Minerals LLC and Midland Trail Resources LLC in April 2013 . Cambrian Coal Corp. , owned by the private Booth Energy Group , based in Debord, Ky. , is negotiating a deal to buy the public TECO Energy's coal mining operations in West Virginia , Kentucky and Virginia for $170 million . Like coal prices, coal ownership trends are cyclical, Thompson said. Steel companies once owned coal mines, then electric utilities moved in, followed by oil companies for easy access to its key power production ingredient. But this year's coal mergers and acquisitions will continue to be propelled by prices, said Caleb Dorfman , an analyst with Simmons & Company International , based in Houston . "The currently stressed market environment will continue to result in asset divestiture activity." Katelyn Ferral is a staff writer for Trib Total Media. She can be reached at 412-380-5627 or kferral@tribweb.com . ___ (c)2015 The Pittsburgh Tribune-Review (Greensburg, Pa.) Visit The Pittsburgh Tribune-Review (Greensburg, Pa.) at www.triblive.com |