India Seeks Australian Coking Coal: Gujarat AUGUST 24, 2009,...

India Seeks Australian Coking Coal: Gujarat
AUGUST 24, 2009, 9:49 A.M. ET
By ALEX WILSON

MELBOURNE -- India is hungry for access to Australia's hard coking coal but a wave of acquisitions like that seen from China is unlikely for now, with most assets tightly held by mining majors, Gujarat NRE Minerals Ltd. Chairman Arun Jagatramka said.

"Despite the downturn, you haven't seen a single asset with such coal quality out there because most of the hard coking coal is owned by the five big majors," he told Dow Jones Newswires in an interview.

"There are a lot of companies in India, including state-owned Coal India, looking to acquire and to invest in coal assets abroad and Australia is a natural fit for the Indian market but I don't think there are a lot of opportunities out there."

Gujarat NRE, the Australian-listed subsidiary of Indian coal giant Gujarat NRE Coke Ltd., operates two hard coking coal mines in New South Wales state and is seeking to further boost its Australian presence with a takeover of Rey Resources Ltd.

The directors of Rey have rejected the bid, which is pitched below Rey's current market price, but Jagatramka said Gujarat believes its share bid will deliver value in the long run and there are no plans to up its offer.

If successful, Jagatramka said Gujarat plans to develop Rey's thermal coal asset in Western Australia state's Canning Basin and ship the coal to India.

India has huge coal resources of its own, with reserves of 257 billion metric tons and is the third biggest coal producer globally, behind China and the U.S.

But the breakneck pace of India's economic growth means it will need to go looking for sources of supply overseas, with state-owned Coal India Ltd. last month warning of a possible domestic shortfall of more than 200 million tons of coal in fiscal 2012.

Jagatramka said that India's most pressing need is for premium hard coking coal to feed its steel sector, whose capacity is expected to grow to 124 million tons a year by fiscal 2012 from 65 million tons currently.

"The Indian market is hungry for both coking coal and thermal coal," he said.

"Coking coal is very critical, whereas our thermal coal needs ultimately could be met from other sources like Indonesia and South Africa and power generation can be met by other means like hydro, solar, wind or nuclear."

Gujarat's bid for Rey has failed to gain traction, with the offer pitched at one Gujarat share for every five Rey shares, or 12.6 cents at current prices, or alternatively a cash option of nine cents a share.

Both are well below Rey's last share price Friday of 20.5 cents a share and the target's directors have vigorously advised their shareholders to reject the offer.

Jagatramka insists Gujarat's shares are worth a lot more than the level they are currently trading at -- they ended Friday at 63 Australian cents -- and said the predator will not be increasing its offer.

"I don't think that we need to change the value of our offer or to withdraw it," he said.

The market is not familiar with Gujarat and its assets and is not ascribing fair value to them, Jagatramka said, pointing out that its current market capitalization values its coking coal resources at less than US$1 a ton.

For an indication of how this compares with fair value, he points to BHP Billiton Ltd.'s purchase last year of the New Saraji asset -- which is a greenfields project not a producing mine like Gujarat's -- for US$3.50 a ton.

Opponents of the offer for Rey point out that Gujarat's stock is illiquid, being 82% controlled by its parent.

Jagatramka said Gujarat plans to maintain a controlling stake in its local unit but is open to dilution of its stake over time, although only at prices that better reflect the value of its assets than the current stock price.

While Rey's directors may take some convincing, Gujarat has had more luck with Australia's Foreign Investment Review Board, which has already given the deal the green light.

FIRB approval has been a stumbling block for a number of Chinese deals but Jagatramka said he believes Indian investment is being welcomed by Australia.

"I strongly feel so, given the acceptability that we have found amongst all the tiers of government, right from local to a state and federal level," he said.

Indian investment was aided by the common ground Australia shares with India in terms of the English language, Commonwealth-based laws and democratic process, he said.

Gujarat has been Rey's biggest shareholder since the company was listed in 2006 and currently holds a 16.6% stake in its target.

Aside from the bid for Rey, Gujarat is focused on the expansion of its existing mines and this month announced it is in the final stages of commissioning longwall mining at its NRE Wongawilli mine to boost output to about 1.5 million tons a year from the 179,000 tons produced in the year ended June 30.

Gujarat is investing A$475 million in expansion projects over the next four years and plans to boost total output from its mines to 5.9 million metric tons a year by fiscal 2012 and then 7.1 million tons by fiscal 2014.

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