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Coal's Glow Attracts Major Miners - WSJ


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My feeling is that metallurgical coal miners will be disappointed in the next 10 years. But thermal coal producers will do well. After all, you can only build that much infrastructure. However, when infrastructure is there and living condition improves, the need for electricity will continue to rise. I talked to my mother the other day and recounted how little electricity we used back then. There was just no way to use it. And now? They are planning to put a third air-conditioner in the apartment. I almost forgot, a mac and a notebook. My parents used to scold that we kids should play less with computers. Now they cannot live without them once they learned how to use them.


Coal's Glow Attracts Major Miners


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For mining companies, the black stuff is now the right stuff.


The sector's confidence in emerging market demand for coal, especially the sort used in steel making, is keeping deal activity brisk. Four of the 10 largestmining-sector mergers and acquisitions in the first half of this year were for metallurgical coal assets, according to PwC. Total deal value so far this year, at nearly $19 billion, is already close to last year's $22 billion total. Peabody Energy and ArcelorMittal's $5 billion agreed bid for Macarthur Coal late last month is unlikely to be the last transaction. Anglo American, which was in the running for Macarthur, remains on the prowl for acquisitions, as do other mining majors.


The attraction of coal assets has increased partly due to rising imports from China over the last two years. Coal prices remain high despite concerns about the global economy. Contract prices for the third quarter, at $315 per ton, are at their second-highest level ever, according to Macquarie. For miners, buying existing coal assets provides a quick way to bulk up and perhaps diversify geographically—key for a commodity where supply this year has been disrupted by flooding in Australia. Existing players should enjoy savings in areas like procurement.


But strong demand and a scarcity of top-notch coal assets can lead to punchy valuations. Acquirers this year have paid 13.2 times trailing operating profit for coal companies, compared with an 11.2 times average over the previous decade, according to IHS Herold. Peabody and ArcelorMittal are paying 20.8 times trailing operating profit for Macarthur.


Macarthur's price reflects the quality of the asset, according a person close to the deal. It is the world's largest producer of pulverized metallurgical coal, and requires no extra spending on infrastructure.


Fears of a rival bid from Macarthur's 31%-owners China's Citic and Korea's Posco may also have pushed up the price. But it suggests other potential targets for companies like Anglo, which is looking for bolt-on acquisitions worth around $5 billion, may be undervalued. The U.S.'s Walter Energy trades at 7 times expected 2012 earnings while Australia's Whitehaven Coal trades at 10.4 times, compared with Macarthur's 15.2 times, according to Factset data.


Even if market volatility brings a pause to deal making, coal M&A should stay red hot.


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