Comical Coal Deals Point to Market Bottom

Investors looking for clues that the coal market will struggle to fall much further were handed valuable ammunition this week, after a major Australian coal mine changed hands on Thursday for just one Australian dollar.

Only three years ago, the mine was valued at nearly A$1 billion, after Sumitomo Corp., one of Japan’s largest trading houses, paid A$430 million for a 50 per cent share of the mine in 2012. Sitting in Queensland’s coal-rich Bowen Basin, the Isaac Plains operation was producing nearly 3 million tonnes of high value coking coal each year, whilst the remaining 50 per cent was held by Brazil’s mining giant Vale.

Citing low coal prices, the two companies idled the mine in December last year, saying it was “not economically feasible under current market conditions.” Coking coal prices have dropped from over $300 per tonne in 2011 to under $90 per tonne today, whilst thermal coal, used to fire power stations, has fallen below $60 per tonne.

On Thursday, ASX-listed Stanmore Coal jumped at the opportunity to take the mine off their hands, paying A$1.00, equal to 73 US cents. “It’s a nominal sum,” Stanmore’s managing director Nick Jorss said. “I guess for the vendors it’s a small asset for them and if it’s in care and maintenance it’s a liability for them, so we’re looking to turn that liability into an operating cost.”

Stanmore plans to restart operations in the first half of next year, but at a much lower run-rate of around 1 million tonnes per annum. “We’re in a reasonable point in the cycle to be buying assets,” Nick Jorss said with characteristic understatement, describing the deal as “reasonable buying.”

Isaac Plains is not the first comical coal deal of the current market. Two Asian trading houses, Marubeni and Winsway Enterprises, jointly paid $1 billion for Canadian coal miner Grande Cache in 2011, but late last year they resold the company for $2.00, or $1.00 each, which was met by derision by journalists and analysts alike.

Russian steelmaker Severstal meanwhile paid $900 million for a cluster of coal mines in the US in 2008, before reselling them for $60 million, whilst US-based Walter Energy paid $3.3 billion for coal assets in Canada in 2011, before disappearing into bankruptcy earlier this month. Most spectacularly, Rio Tinto sold its coal fields in Mozambique last year for $50 million, having paid $3.7 billion for the deposits in 2011.

Whilst companies are throwing coal assets out, investors appear to still be alive to bargains to be had in the mining sector, driving Stanmore’s shares more than 70 per cent higher on the news to 13.5 Australian cents. “The Isaac Plains project was one of the most exciting coal projects in Australia,” wrote analysts at Investec, highlighting how suddenly coal’s fortunes have dropped.