nhc comes to the party., page-15

Plot thickens in Peabody's pursuit of Macarthur Coal.

BY jeffrey tomich
ST. LOUIS POST-DISPATCH
10/4/2010

The race to acquire Australia's Macarthur Coal Ltd. may get more crowded with signals that Swiss mining giant Xstrata Plc may jump in, providing a formidable challenger for Peabody Energy Corp. Macarthur disclosed Friday that investment bankers representing Xstrata approached one of the company's largest shareholders.

While Xstrata is showing no firm indication that it's weighing a bid, the mere mention of the Swiss company as a potential suitor set off speculation that a bidding war may be brewing. It also underscores the value being placed on reserves of coal used for steelmaking amid the economic growth in developing countries and the rest of the world.

"I think it's another confirmation that the world's supply of metallurgical-quality coal will be much tighter over the next few years than investors or steel companies would have thought six months ago," said Jefferies & Co. analyst Michael Dudas.

The mining industry drama began March 30 when St. Louis-based Peabody offered $3 billion in cash for Macarthur. It sweetened its offer to $3.3 billion on Tuesday. Thursday night, Australian coal producer New Hope Corp. jumped into the fray, offering $3.44 billion in stock for Macarthur.
Macarthur's board has turned down both Peabody as well as the New Hope bids, saying they don't fully value the company given its expansion plans. Hours later, Macarthur issued another statement noting the contact between Xstrata's bankers and one of its major shareholders.

"You have to worry whenever an Xstrata gets involved because they're a global miner and have deeper pockets," said FBR Capital Markets analyst David Khani.

Macarthur didn't disclose which of its big three shareholders was involved. They include CITIC Resources, ArcelorMittal and POSCO, which collectively own 47 percent the company. Queensland-based Macarthur operates two mines that produced almost 5 million tons of coal last year. But the company is in the midst of an expansion and plans to double output by 2014. The company, which had been rumored as a takeover candidate, represents an attractive vehicle for Peabody to expand its presence in Asia-Pacific coal market, Khani said. And Peabody has the financial muscle to afford 16 Australian dollars a share, compared with the current offer of 14 Australian dollars, and still have the acquisition add to earnings no later than 2012.

Khani said a more attractive option would be to acquire a majority interest in a joint venture with Macarthur's big three shareholders.

A Peabody spokeswoman declined to comment more specifically on the New Hope offer or possibility of an Xstrata bid. The offers from Peabody and New Hope are conditional on Macarthur calling off a December agreement to purchase Gloucester Coal Ltd. Macarthur shareholders were set to vote on Monday on whether to issue shares to finalize the transaction. But the company's board decided late Thursday to postpone the vote until April 19 because some shareholders said they didn't have sufficient time to review all of the proposals. The fact that the shareholder vote has been delayed is an indication that Macarthur's board is willing to more carefully consider one of the bids.

"Peabody needs to convince these three largest shareholders, and/or Macarthur's board and others shareholders, that hitching their wagon to Peabody is well worth the ride," Khani said.

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