Thermal
Feature Articles
Global Recovery a Catalyst for M&A Activity
July 2021
Encouraged by thermal coal price growth, miners are reviewing expansion plans and raising capital for new projects and acquisitions. M&A activity is increasing, as are valuations and divestment.

In 2021, AME expect macroeconomics will also remain a major contributor to deal activity. Towards the end of last year, the global stock markets were buoyed by progress on COVID-19 vaccines, increased government stimulus measures and the outcome of the US presidential election. As global economic activity continues to pick up this year and thermal coal prices increase, AME expect to M&A activity continue to pick up.

 

Glencore Snaps up Cerrejón

Glencore will become the sole owner of the Cerrejón thermal coal mine in Colombia by buying out partners BHP and Anglo American. This boosts its coal assets at a time when others are looking to exit the sector.

Based on expected operating performance, current coal prices and assuming the closing happens as planned, Glencore will likely pay only US$230m, making the estimated investment payback period less than two years from closing.

Glencore has been involved with Cerrejón for more than 20 years. The deal would replace coal output lost when Glencore decided in February to mothball production at Prodeco, another Colombian coal mine. 

 

 

Subject to the satisfaction of customary competition and regulatory requirements, Glencore will assume full ownership and operating control of Cerrejón. Completion is expected to occur in the first half of the 2022.

Cerrejón is one of the world’s largest surface mining operations, extracting high-quality thermal coal for the export market. Glencore sees production volumes at the mine declining materially by 2030.  The mine produced 12.4Mt of coal in 2020. Despite the expected fall in output, the acquisition of Cerrejón will boost Glencore’s thermal coal production to about 125Mt this year, from earlier guidance of 110Mt.

 

Cerrejón Mine Production

 

Seriti Wraps Up South32 Acquisition 

South Africa’s Seriti Resources has confirmed that all conditions precedent to its acquisition of South32 SA Coal Holdings Pty Ltd (SAEC) have been fulfilled, and the sale is expected to be completed on 1 June 2021. 

The new shareholders of 100% of SAEC will be Seriti Resources (90%), and the SAEC Employee and Community Trusts (5% each).  This transaction secures reliable, and cost-effective thermal coal supply to Power Generator Eskom.  Eskom and Seriti have agreed to a number of proposals to improve the long-term supply of thermal coal to Eskom, including commitments for continued supply from the Kriel and New Largo thermal coal mines. 

Seriti Resources operates three large-scale, opencut and underground thermal coal mines, New Vaal, New Denmark and Kriel , which it acquired from Anglo American. Seriti intends to develop its New Largo thermal coal project into a large-scale, opencast coal mine capable of providing the baseload fuel requirements for Eskom’s Kusile power station.

 

New Hope/Golden Energy Eye Mt Arthur

The rebound in coal prices is encouraging Australian coal miner New Hope to re-run the ruler over expansion plans and raising capital for acquisitions.  New Hope Corporation, raised about US$152m late last month which may be used for further growth expansion and opportunistic M&A activity.

Stanmore Resources majority owner, Golden Energy, will increase a loan facility to US$70m, partly to help the Australian coal miner advance its Isaac Plains project.  New Hope and Golden Energy are seen as potential suitors for some of BHP Group's Australian coal assets, including the Mt. Arthur thermal coal mine. BHP had announced its intention to sell off its thermal-coal operations by the end of 2022.

New Hope however is seeking new M&A opportunities at the lower end of the cost curve, with value-creating from day one and have long term approvals in place. Mt. Arthur's operating licence is set to expire in 2026 although BHP has applied to extend it. Another prospective bidder for the BHP asset is a coalition of activist investor Elliott Management and coal miner Peabody.

 

Anglo Spins-off Thungela

The demerger of Anglo American’s South African thermal coal assets was completed on 7 June. Anglo will provide an initial cash injection of US$180.5 million to the spin-off company, Thungela Resources Limited, and sell and market its products for at least three years. 

The demerger of Thungela comes at a time of significant gains in South African thermal coal prices, which have increased by 25% to US$113/t this year.  Thungela holds 90% of the thermal coal operations in South Africa, with the remaining 10% held collectively by an employee partnership plan and a community partnership plan.  The miner has 137Mt of reserves and 756Mt in resources, along with seven operations — four open-pit and three underground.

 

Exxaro - Overlooked Colliery Sale

South Africa’s black empowered coal mining company Exxaro sold three non-core coal mines Dorstfontein, Forzando and Tumelo, collectively known as Exxaro Coal Central, to Overlooked Colliery, a 100% black-owned coal mining company. Exxaro will retain all coal export entitlement through the Richards Bay Coal Terminal. The transaction, which is expected to close in the second half of 2021, is awaiting approval from the Competition Commission and the department of mineral resources and Energy.

Overlooked is a privately held entity which operates the Overlooked Colliery as well as the Weltevreden and Halfgewonnen Collieries which it recently acquired from Sudor Coal. Overlooked currently produces 2.4Mtpa and plans to double that to 4.8Mtpa by 2022.

Exxaro, the largest supplier of thermal coal to Eskom, has embarked on a strategy that will see it slowly diversify away from coal and into greener alternative energy technologies.

 

Thermal Coal Exits

It is quite clear that stakeholders – including financiers - are facing significant pressure to meet Environmental, Sustainability and Corporate Governance (ESG) standards.  Thermal coal exits by the larger global miners be it as a result of bank, shareholder or activist pressure will continue. This theme is being played out across the globe and is evident in the exits from thermal coal by BHP, Anglo American, South32 and Exxaro particularly in South Africa.  South African divestments are being driven by the governments Black Economic Empowerment (BEE) policy.

However, emerging markets still require an efficient and cheap energy source to assist in their industrialisation drives - the developed countries having gained significant benefit from thermal coal in their industrialising - and despite pressure, Africa, India and China will still be reliant on thermal coal for years to come.

 

Capital Reallocation

Access to project development capital has become a key enabler of deals, and the capital landscape for thermal coal projects is changing, largely due to decarbonisation. AME are seeing an accelerating trend of commitments to net zero beyond Europe. Major global corporations are increasingly announcing carbon-neutral targets as part of their ESG programmes.

Private equity, pension and sovereign wealth funds, as well as banks and insurers, continue to announce climate priorities. These initiatives will lead investor classes to reallocate capital between asset groups. Ultimately, they will dictate which mergers and acquisitions get done and by whom.