Photo by Sim Kih
IN SUCCESSFULLY buying a 49% stake in a coal mine, Abterra has closed a deal considered rare: PRC coal mines are tightly governed as national assets by the government.
Adding sizzle to its coup, Abterra, whose stock sometimes is traded heavily on the Singapore Exchange, clinched a whopper of a bargain when the deal was closed, as announced yesterday (May 29).
Consider that Singapore-listed Noble Group is currently offering A$447.7 million for a 78.3% stake in Gloucester Coal, which has 38 million tons of coal reserves.
Abterra, in comparison, paid RMB 188 million for a 49% stake in Shanxi Tai Xing Jiao Zhong Coal Industry Company Limited which has access to 50.3 million tons of coal.
The latter company owns the Jiao Zhong Coal Mine in Shanxi Province, PRC, which produces high quality semi-hard coking coal.
Construction of the mine began in 1983, and production started in 1986.
"Tai Xing will start to make contributions to Abterra in 2009 but we expect to reap the maximum benefits in 2011 after we finish upgrading the facilities, which will increase our processing capacity from 150,000 tons to 900,000 tons per annum," said Mr Jaffe Lau, the CEO of Abterra, in a press statement.
The acquisition enables Abterra to enhance its capabilities along the supply chain and achieve higher profit margins than trading in mineral resources.
In the second half of last year, trading of coke and coal accounted for 70.6% of Abterra's revenue. Iron ore made up a further 18.5% of revenue.
Abterra plans to increase its own output in the next two or three years.
"We have set ambitious targets and have the resources to deliver on those targets. The target of the Group is to continue to make strategic acquisitions of coking coal mines to grow our production capacity to 5 million tonnes per annum in the next 2-3 years," said Mr Lau.
Abterra’s purchase has another interesting twist in that the reserves now estimated in the coal mine has been bumped up by 40 million tonnes from the 10 million earlier announced.
The theoretical financial upside of the additional reserves is illustrated by the table on the right.
Speaking from Hong Kong yesterday, Mr Lau answered the following questions posed by the media:
Q: Does Abterra need to inject cash to increase capacity from 150,000 tons to 900,000 tons?
Mr Lau: We do not expect to because our existing mining resources is generating cash. There will be no borrowings or external funding for this.
Q: Will you be able to complete the other proposed acquisition (of 22.8% in Zuoquan Xinrui) this year?
Mr Lau: This acquisition is undergoing the necessary documentation. Yes, we expect this 2nd acquisition to be completed this year.
Q: You set aside about Rmb 300 million for M&A. Does this mean we can expect more acquisitions this year?
Mr Lau: We have a small investment in Yongxing. We have expansion plans for our coal mines.
Q: How much is Yongxing producing now?
Mr Lau: When we acquired it at the beginning of last year, it was producing about 300,000 metrics tons a year.We expect this to increase to 900,000 metric tons in a few months.
Q: Are you looking at other acquisitions?
Mr Lau: In addition to Taixing and Xinrui, we have two other coal mine targets. The acquisition of these 2 other targets plus our expansion plans will increase our capacity to about 5 million tons a year. We are planning for this to happen in 2-3 years.
Q: What will be the acquisition price?
Mr Lau: It will be at fair market value. Cannot be compared to the cheap price we paid for our first mine.
Q: What's your outlook on the coal market?
Mr Lau: Before the global crisis last year, coal prices were as high as Rmb 2,000 per ton. It fell to a low of Rmb 800 in March this year but has since rebounded to Rmb 1,100. I think domestic coal prices will remain stable; supply will be restricted as small mines are still being closed down by the government.
Q: What about the other business segments?
Mr Lau: We are targeting one more mine - for iron ore. But this will have to wait until the market for iron ore improves - i.e. a recovery in the global economy.
Q: So now you will concentrate on the coal business?
Mr Lau: Yes.
Q: Do you need to raise more cash?
Mr Lau: Not currently, but we may look into this if we come across further M&A opportunities.
