STRATEGIC investors in the coal sector have dramatically increased their share of resources.
This comes as dominant players lock up supply in developing assets, long before production has startedThis
A Citi report has concluded, from an analysis of about 80 coal-related deals from the past four years - worth $US35 billion - that strategic investors have increased their share of resources purchased from 38 per cent in 2007 to 85 per cent today.
The investors also dominate the number of transactions, with 16 of 25 deals this year in the hands of strategic investors.
"We believe the pace of coal merger and acquisition activity will continue as more resources are unlocked by emerging companies," analyst David Haddad said.
"With perhaps the exception of gold, coalmining more than any other sector has attracted corporate predators keen to secure an old-fashioned but highly in-demand commodity." State-owned Coal India, the world's biggest coal producer, reaffirmed its interest in Australian assets last month, when it said it was close to securing a local project.
Nathan Tinkler's coal start-up, Aston Resources, secured a Japanese investor last week, when it announced Itochu had taken a 15 per cent stake in Aston's NSW Maules Creek project for $345 million.
The most recent coal company to be in play is Mozambique-focused Riversdale Mining, which announced last week it had been in takeover talks with Rio Tinto about a $3.5bn, or $15-a-share, bid.
Mr Haddad said that while strategic investors, mostly Asian steel mills or traders, had always been present at the asset or corporate level, they had until recently tended to assume a "background role", such as Japanese traders and steelmakers in Australian coal companies holding 5 to 10 per cent of an asset.
"Our analysis suggests that this group is now the driving force in coal M&A, buying 85 per cent of resource tonnes transacted," he said. "We estimate that strategic investors now account for almost two-thirds of the volume of transactions - 16 of 25 completed and potential transactions in 2010 - and now dominate the total value of deals with $US9bn out of a total of $US15bn for the year to date."
Chinese and Indian investors have proved recently they are willing to back a junior with a large resource, coming in at an early stage to provide funding to help speed up production and then future expansion.
Citi's report highlighted the fact that the average size of coal resource underlying transactions this year was 591 million tonnes for coal company purchases versus 1.8 billion tonnes for strategic investor purchases. "Strategic investors show a preference for large coal deposits as we consider their overarching motivation to be security of supply," Mr Haddad said.
Apart from companies already in play, such as Northern Energy Corporation and Riversdale Mining, Citi highlighted Whitehaven Coal, which had opened a data room, Resource Generation and Cockatoo Coal, as strong candidates for merger and acquisition activity.
"With new resources being unlocked by emerging coal companies and a strong level of competition for these assets, we strongly believe that there is still plenty of M&A to come in the coal sector," Mr Haddad said.
