THE COAL RESERVES of iron and coal trader Shanxi Taixing Jiaozhong Coal Industry Co have been revalued to be six times that of previous estimates.
Proven reserves - that is, estimated coal deposits likely to be mined - were revalued to 61.4 million tons this month by Shanxi Coal Geological Assessment Institute.
That's much higher than the 10.2 million tons previously estimated when Abterra inked an agreement to acquire a 49% stake in the mine in 2007.
”Coal mining activities will positively impact FY09 earnings,” said Abterra’s CEO, Jaffe Lau, at a Financial PR road show last week.
A shrinking supply keeps coal prices high - China shut down 12,209 coalmines in 2008, causing its annual production capacity to be reduced by 300 million metric tons.
”The value of our coking coal is much higher than thermal coal”, clarified Jaffe. ”Coking coal in China is valued at 3 times that of thermal coal.”
The company’s strategy is to transform from a coal and iron ore trading business to an integrated supply chain providing raw materials to the steel sector, and its plan includes mine ownership.
So far, it has been showing an ability to pick up mine operators at bargain prices.
The acquisition of Taixing Jiaozhong, completed on 29 May, was a bargain at Rmb 188 million, considering that mines with similar reserves in Shanxi are asking for as much as Rmb 3 billion.
Its first coal mine (15%-owned Zuoquan Yongxing) had capacity of Rmb 300 million metric tons a year at the time of acquisition in mid 2007.
The good news is: Yongxing's licensed capacity will be increased to Rmb 900 million tons by 2011 and will further increase to Rmb 1.5 billion thereafter.
However, this investment in the associate is still recorded on Abterra’s books at cost of Rmb 60 million.
Below is a summary of Jaffe’s answers to queries raised by investors at the road show:
Q: How did the coal reserves in Taixing Jiaozhong suddenly increase?
A: There are currently over 2,000 mines in the Shanxi province. These will be consolidated to only 300 mines by 2011. Qualification for operator license will depend on scale of production capacity; that is, the large players will stay.
Abterra’s major shareholder, General Nice Group, has been in Shanxi since 1992 and is the first foreign investor in the inland province.
We sent a petition to the Shanxi government asking for support of our mines, and to consider how we have remained vested Shanxi for about 2 decades. (Currently, there are only one or two foreign investors left in Shanxi.)
The petition was acceded to and the government granted us access to another 40 million to 50 million tons of coal reserves.
This will enable us to be one of the 300 mine operators post-consolidation and allow us access to the smaller mines that shut down after their operation license is withdrawn.
Q: What is your cost of production?
A: Today, it costs about Rmb 300 to Rmb 350 to produce a ton of coking coal.
Q: What is your selling price?
A: Coking coal sells at US$160-US$200 a ton in China, which is higher than the global benchmark FOB price of US$150.
Chinese coking coal is always slightly higher than imports because the government wants to conserve domestic resources.
Abterra's stock price up 3-fold after the co completed the acquisition of Taixing Jiaozhong.
Q: Where are your customers and where do your products end up?
A: We sell directly to domestic steel mills.
Q: Is your target capacity of 5 million tons a year for coal attributive or aggregate?
A: It is the aggregate capacity of all the mines we want to hold stakes in. The government restricts foreign investors from holding major ownership in domestic mines.
Q: How do you intend to achieve this 5 million-ton target?
A: We will expand the capacity of our existing mines and acquire stakes in other mines.
Q: How will you finance the M&A?
A: It will be financed using internal cash reserves and share issue. After being acquired, the mines will become cash cows for us to fund more M&A.
