The Australian coal market is famously volatile. So why are so few companies built to withstand the cycle?
Once a busy corner of frenzied bidding battles, Australian coal miners have become a dwindling breed.
Battling thermal coal prices of $56 per tonne, down from over $150 in 2011, Whitehaven is nursing losses after an ill-timed acquisition, Cockatoo Coal’s share count has billowed to 3.4 billion and Bandanna Energy has dropped from $2 to 1 cent.
Coal mining majors have been blindsided just as badly, with Rio Tinto, Anglo American and Peabody all currently trying to exit Australian thermal coal. Vale meanwhile sold its Isaacs Plains asset in Queensland this year for just one Australian dollar. Three years ago, 50 per cent of the mine sold for A$430m.
But for two groups, Wesfarmers and New Hope Corp, prices are moving to their advantage. In glaring contrast to the wider industry, both have consistently bought in at the bottom and both have one thing in common: their coal businesses are run by conglomerates, with eyes on many disparate industries at once.
Wesfarmers
Valued at A$44bn ($31bn), Wesfarmers is a supermarket, farming and insurance group, yet its timing in coal has been faultless, picking up the Bengala mine at a cyclical trough in the 1990s and its Curragh mine in Queensland at another low in 2000.
It has doubled tonnage at Curragh to over 8m tonnes per annum and last year paid Peabody A$70m for a bordering tenement, which changed hands in 2010 for A$334m.
Earnings at its resources business have slumped, it has shortened shifts and announced three rounds of job cuts, but the division has remained profitable and is rumoured to be eyeing a coal deal in Canada.
New Hope
New Hope is a straight-up coal miner, but runs a profitable side-business in cattle grazing and made A$326m in 2010 by selling a coal-gas business to Royal Dutch Shell. It is also 60 per cent owned by Washington H Soul Pattinson, a listed holding company for the Sydney-based Millner family, with interests in everything from brickmakers to drug stores.
New Hope famously picked-up the East Saraji coal tenement in Queensland after it was relinquished by BHP Billiton in 2002, drilling out the deposit and selling it back to BHP for A$2.5bn in cash in 2008, after coal prices had tripled.
According to results this week, the company has suffered impairments on its oil assets, but underlying profits are rising and New Hope has paid over A$200m in dividends in the last two years, versus its A$1.4bn market cap. After a A$25m deal with Cockatoo last year, it is sitting on 15,000 hectares of coal tenements and A$1.1bn in cash and plans to triple its coal business from 6m tonnes per annum.
Duck & Dive
The success of Wesfarmers and New Hope in timing the cycle raises the question of why conventional coal miners are so reliably flummoxed by each market wobble.
Playing the coal cycle is not nearly as easy as it sounds, says Perth-based coal boss Russell Moran, who this week launched a new venture in western Canada, BC Anthracite. “Coal projects are either worth a lot of money or they’re worth nothing,” he says.
“There’s a large amount of infrastructure involved, so it’s very tough to play the market, because the lead time on permits and construction are so long. Even if you see the coal market turning, you don’t necessarily have the ability to duck and dive.”
Long-Term Minded
Another explanation is that multi-industry conglomerates are sufficiently removed from coal to take a cool-headed view of the cycle. Steel groups panic when their coal input costs rise, encouraging deals at the top of the market, whilst mining companies are incentivised to over-invest when prices are booming, but conglomerates seem better positioned to see where coal sits, relative to other industries.
Wesfarmers and Washington H Soul Pattinson, which has moved office just once in 113 years, both also seem willing to risk becoming unfashionable by remaining long-term minded.
New Hope’s managing director Shane Stephan has said the company is “fortunate” to have its ownership structure, giving it a longer-term view than rivals, whilst Wesfarmers’ chairman Michael Chaney told investors in May that the board’s patient outlook was unsuited to hedge funds and traders. “I’m sorry, but that’s the way we’re running the company,” he said. “We can’t please everyone all the time.”
Overpaying
Interestingly, Wesfarmers is accused of overpaying for its largest retail operation, Coles, bought for $20bn in 2007, suggesting that management teams, however cautious, are inclined to see too much upside in their core line of business. Buying Wesfarmers for its coal exposure would also be like buying Rio Tinto for its office space in London.
But industry observers looking for clues of a coal market bottom could do worse than mimic the timing of two of Australia’s most staid investment groups. “Be greedy when others are fearful,” Wesfarmers’ managing director Richard Goyder said this week. “Now is the time, in a cyclical downturn, to really be thinking about opportunities.”
Co-published by Global Mining Observer