| Caledon: Is It Worth US$1bn?

10th Aug '09 by marben100

22 comments 7090 reads

With a current market cap ITRO £150m, the proposition of this thread may seem a little far-fetched - but is it?

Caledon has been in an offer period since the start of 2009 and press reports suggest that bid talks may be nearing a conclusion.

The US$1bn figure derives from this article: http://www.telegraphindia.com/1090806/jsp/business/story_11326712.jsp

Mumbai, Aug. 5: The Essar group is in advanced talks to acquire coking coal company Caledon Resources Plc, having mining interests in Australia, for up to $1 billion.

Sources said Mumbai’s Essar had been scouting for coal assets abroad for at least a year as its steel and power companies expand capacities in India...

...The number of potential buyers has now come down to two — the $15bn Essar group and a Chinese company — and a deal is likely to be clinched soon, the sources said.

So, how credible is this article? Let's have a look at supporting evidence. Firstly, along with many other commodites, the coking coal market collapsed around the turn of the year, as steel demand slumped. However, the situation appears to be turning round rapidly - as reported by Caledon at their AGM on 23rd July (see the AGM thread ). More recently there have been reports like this coming out of India: http://steelguru.com/news/index/2009/08/06/MTA1OTI3/Gujarat_NRE_Coke_sees_coking_coal_shortage_in_H2.html

Gujarat NRE Coke sees coking coal shortage in H2

Thursday, 06 Aug 2009

Mr Arun Kumar Jagatramka MD of Gujarat NRE Coke last month said that the current spot prices for coking coal in the last two weeks have been around USD 145 to USD 150 per tonne. He said this signals a very strong coking coal market.

He added that "All of us in the industry have a very strong view that in the second half of this fiscal we could see a very big shortage of coking coal in the world market once the demand really picks up in the developed world."

Mr Jagatramka, in an interview with on CNBC-TV18, said that "Coking coal prices have been settled at USD 128 this year for the Japanese fiscal April to March, but the last few months China has been importing very large quantities of coking coal and it has been pushing up the spot prices. We hear in the industry that the current spot prices for the last two weeks…

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China unlikely to return as net coking coal exporter

CHINA'S appetite for foreign coking coal may moderate over the coming months, but the country won't become a net exporter again due to an overhaul of its mining sector and ongoing demand from coastal steel mills.

That’s good news for Australian producers which provided the majority of China’s coking coal imports in the January-July period, after demand from traditional importers Japan, South Korea and Europe buckled…

…Patersons Coal analyst Andrew Harrington said dozens of Indian companies are "kicking tires" in Queensland.

Last month, Caledon Resourcessaid it was in talks over a takeover offer of up to $US1 billion from India's Essar Minerals.

"Coking coal imports into China are a small story. Future growth will come from India, where there's negligible coking coal," Mr Harrington said.

sangedoma

11th Aug '09

Hello, Marben,

Thanks for the thread. Made an initial investment here yesterday. I was invested in CDN during 2006 when it was involved in the GuangXi gold mines and etc. with Salamis; but the sp did nothing but slide for over a year against whatever good reportings being made. So a heart-break good-bye from me. Learnt from reading WendyD's and your posts on advfn re that specific period of dead lull. Do I understand correctly that it was due to D and Co's persistent selling/dumping in a calculated attempt to supress the price? If what was their move at the end spurring a penultimate turnaround?or how did they turned the situation around to make cdn a winner for them? Unless they bought again at the very lowest when they knew 'what was going to happen' ?? Didn't quite get the gist of the end?! Please reveal their coup in this scenario. I'm thinking maybe ASX:NWT is doing the same thing now as CDN was doing in 2006?

CDN is a different beast altogether now.

Best regards,

marben100

12th Aug '09

Hi pp,

As I understand Wendy's post, I don't think there was a deliberate attempt to suppress the SP. Instead, it was simply a case of early-stage investors taking (substantial) profits when they could. - and there was no disclosure that this was going on (which there should have been).

I will let you know off-board what my thoughts/knowledge are about Polo's reinvestment.

You are certaintly right to say that Caledon is a very different beast now from its gold exploration days.

Mark

13th Aug '09

Looks like the Felix deal is done, subject to shareholder & regulatory approvals: http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=00977321

Price agreed: A$18.0/share (inclusive of dividend). The announcement of a recommended offer doesn't preclude the possibility of a counter-bid.

24th Aug '09

Looks like coking coal is continuing its uptrend: http://www.ft.com/cms/s/0/1c744c2c-9009-11de-bc59-00144feabdc0.html

Coal prices have jumped to their highest in a year as a drop in Chinese domestic output forces the country to import.

The shift has particularly benefited the price of coking coal, used for steelmaking and much scarcer than thermal coal, which fires power plants...

...Spot prices for coking coal surged last week to $160 a tonne, up almost 40 per cent in the last three months and the highest in 12 months...

The ball is now firmly in Caledon's court to demonstrate that it really can up production to meet this evident demand. It ought to be highly profitable for Caledon to maximise output at these price levels. Should be able to make US$50/tonne, gross, at these levels for additional coal shipped over and above what is contracted for.

Meanwhile, the SP has been drifting back a bit from recent highs. ISTM that speculators are getting bored with the lack of concrete news on offers being made for the company. IF Caledon "walks the walk" re production, I believe that the current valuaton will loook rather attractive irrespective of any bid (unless, of course, demand plunges again).

Regards,

Gero

30th Aug '09

With thanks to MaxValue uk iii bb

Interesting article on demand for coal mines:

http://uk.reuters.com/article/idUKLNE57R01020090828

Gives a price of $US1 per tonne of proven resource as a valuation for buyout.

CDN reported in 07/05/2009 that as at April 2009 the coal resource estimate at the Cook mine was 406 million tonnes. And the Minyango resource estimate was 342 million tonnes.

Both Resource estimates were reported in accordance with the 2004 version of the JORC Code.

This would give a total CDN coal resource of 748 million tonnes.

At the $US1 per tonne the CDN mines would be worth $US748m

@$1 = 0.6148GBP = 459,870,400GBP (~A$890,476,190)

With the 209,983,849 CDN shares in issues, this equates to a valuation of:

2.19GBP per share. (~A$4.25)

Add in other assets and cash etc then the take out price for CDN could be in the 2.20 - 2.50GBP range.

Just my thoughts.

DYOR

MV.

18th Sep '09

Some developments in coking coal market: http://www.theaustralian.news.com.au/business/story/0,28124,26091087-5005200,00.html

China unlikely to return as net coking coal exporter

CHINA'S appetite for foreign coking coal may moderate over the coming months, but the country won't become a net exporter again due to an overhaul of its mining sector and ongoing demand from coastal steel mills.

That’s good news for Australian producers which provided the majority of China’s coking coal imports in the January-July period, after demand from traditional importers Japan, South Korea and Europe buckled…

…Patersons Coal analyst Andrew Harrington said dozens of Indian companies are "kicking tires" in Queensland.

Last month, Caledon Resourcessaid it was in talks over a takeover offer of up to $US1 billion from India's Essar Minerals.

"Coking coal imports into China are a small story. Future growth will come from India, where there's negligible coking coal," Mr Harrington said.

29th Sep '09

ISTM that the market hasn't appreciated the significance of yesterday and today's announcements by Caledon. In my experience, that isn't surprising - the market isn't very good at understanding technical reports. To quote from the thread header, which I posted on 10th August:

The PFS results included in the AGM presentation indicate potential production from Minyango of 4.5Mtpa - suggest it could easily be worth more than Cook however, based on the June quartery report it appears that further coke testing will be required to confirm whether the prospective coking coal quality matches that of Cook (if not, it's prospective sale price could be considerably lower).

AIUI today's announcement confirms that Minyango's coking coal IS of the requisite quality:

The above results provide a more complete analysis of the coking coal quality that can be produced at Minyango and confirm that it sits comfortably in the sought after low-medium volatile and low sulphur category. These results give added confidence to the viability of the project and will provide a solid foundation for future discussions with potential consumers of the coal.

Crucially, confirmation of these parameters would undoubtedly be a prerequisite to any deal being struck. So IMO we are a significant step closer to reaching a deal. AFAICS, there are no longer any techical obstacles to a price being agreed.

nigelpm

Looks good Mark.

I took an opening gambit in this today on the back of those announcements.

30th Sep '09

More news on the coking coal market: http://www.business-standard.com/india/news/coking-coal-prices-may-touch-200tn-in-2010-11/371547/

Driven by surge in imports of coking coal by China, growth in Japanese steel output and signs of recovery in the Indian economy, spot prices of the raw material are expected to firm up in the international market.

Global prices of coking coal, which are currently hovering around $160-170 a tonne, are expected to harden further and reach $200 a tonne in 2010-11, says a report by Citi Investment Research and Analysis, a division of Citigroup Global Markets Inc...

Cook's coking coal is "semi-hard" (distinct from "semi-soft"!) and trades at a small discount to top quality hard coking coal. I have posed a question to the company of how they believe the Minyango coal will be positioned relative to Cook coal in the market, based on the test results. My impression, based on the company's statements is that it is similar but I would like to have that confirmed.

Caledon must issue a quarterly production report by the end of October. I am expecting the September quarter to be rather weak, with low production. We should, however, have a more encouraging outlook statement, based on what was said in the recent interims:

The outlook is now much more encouraging as China has unexpectedly increased its imports to a level that has effectively replaced the demand lost from more traditional Asian and European markets. Indian demand is also proving to be resilient. Given this change in outlook, Caledon is currently implementing plans to increase production whilst maintaining current manning and equipment levels. A key component of this plan is the move to a more balanced mix of primary development and lower cost extraction from developed resources. The impact of this will start to be seen in the fourth quarter and will result in current year production and sales at the upper end of the previously advised range of 450-500kt, with further growth in 2010.

Clearly, an increase in production without increasing manning levels will have a strongly beneficial effect on cost/tonne. Not hard to figure out the effect on profits of falling costs and rising sales prices! [The converse of the double-whammy suffered by the company this year.]

Cheers,

I have now had a response from Caledon to my query and their view is that the quality of the Minyango coking coal is at least as good as that of Cook. :0)

djpreston

Nice to have it confirmed Mark. Thanks for that.

Seems to me that cdn is now a prime candidate for a deal, along with the other coal plays.

D

JPGH

On the back on the announcement and the luke warm market response I finally got around and bought some today. Thanks Mark for all your insight (and to some of the ADVFN posters too). Fingers crossed for a decent bid now.

16th Oct '09

MARTIN COLLINS: John Durie | October 17, 2009

Article from: The Australian

http://www.theaustralian.news.com.au/story/0,25197,26220051-5013408,00.html

"Then there was the team of senior executives from Indian conglomerate Essar whose private jet broke down at Emerald airport in central Queensland, allowing all to see they were in town.

The mission was some due diligence on coal miner Caledon Resources, which is under review from its parent company in a strategic review from Royal Bank of Canada.

The quiet mine visit turned into the talk of the town."

18th Oct '09

INSIDER
October 18, 2009
By Jamie Freed

http://www.brisbanetimes.com.au/business/kathmandu-follows-myers-float-route-20091018-h2v8.html

CALEDON FOCUS

"It seems that the interests of Essar Group of India in the Australian coal sector extend beyond its recent $US150 million bid for Rocklands Richfield, which trumped a rival offer from Jindal Steel & Power of India.

Essar operatives were spotted by astute observers at Emerald airport in the Bowen Basin after their Gulfstream jet broke down. The Essar executives are said to have been visiting projects owned by Caledon Resources.

Caledon, which has a market value of $33 million, in February appointed RBC Capital Markets to conduct a strategic review after it had received an initial non-binding takeover bid from an unnamed party.

In an update last month, Caledon said it had recently opened its data room to more parties than had been allowed in initially due to increased interest in coking coal assets.

Caledon owns the small Cook mine, which produces 400,000 tonnes a year and has 406 million tonnes of resources, and the Minyango project, which has 342 million tonnes of resources."

jfreed@smh.com.au

Source: The Sydney Morning Herald

30th Oct '09

With thanks to Mr Poshman on iii BB

We'll see how true this is shortly. Its shown as a buy in shares magasine. I would have posted this yesterday but for some reason my online magasine was blurred!! I've had to type it in, so don't yell for typos.

The fight for junior Australian coal producer Caledon Resources (CDN:AIM) is understood to be nearing conclusion as two indian companies go head-to-head, market sources suggest. Energy-to-steel conglomerate Essar is the favourite. The final hurdle is seen to be winning over Xstrata (XTA) which has marketing rights to Caledons coal. - Buy at 54.75p.

8th Dec '09

It appears that the answer to the question posed in the thread title is "no" - at least not yet: http://fool.uk-wire.com/cgi-bin/articles/200912080822057386D.html

The Board of Caledon announces that following an extended strategic review and solicitation of interest in the Company it has decided that it will no longer actively pursue the sale of the Company. Given the positive outlook for coal and the opportunities at hand, Caledon will remain one of the few independent coal producers in the Bowen Basin and focus on growing the production at its Cook mine and developing the Minyango Project.

14th Dec '09

Minesite article on Caledon's situation:

When we last wrote about AIM and ASX-listed Caledon Resources, the managing director, Mark Trevan, was virtually in purdah as earlier in the year the company had asked RBC Capital Markets to find a buyer. The company in the frame was the Essar Group of India, though this was never confirmed officially. But either way, its due diligence went on and on, while junior mining companies were showing strong recovery and the price of coking coal was rising. Meanwhile, Mark could say very little about the bid with the compliance man from RBC breathing over his shoulder, but there was a sense that he could now see a very positive future for the company and hoped the bidder would go away...

Also, Caledon have released a new presentation today: http://www.caledon.com/WebForms/2009InvestorPresentation.html?decash

moniclub

15th Dec '09

Questor says fall overdone: Buy

http://www.telegraph.co.uk/finance/markets/questor/6817901/Caledon-Resources-share-price-fall-looks-overdone.html

Soundbuy

5th Mar '10

Today - Arbuthnot

In breaking news reported by Bloomberg, BHP has agreed a very positive 55% increase in the contract price for coking coal with the major Japanese steel customer, JFE Holdings. The price agreement of $200/t covers only the June 2010 Quarter, but with no stated tonnage. NH8% above our expectations
We had conservatively expected a price for hard coking coal of $185/t to be agreed in 2010 negotiations, therefore this agreement is an 8% improvement on our expectations. Further, the move to a quarterly price vs. a full year term is a major development in the market as suppliers endeavour to move average sales closer to spot prices, and is a positive sign for further price increases from the supply-side

Annualised this increases earnings by over 100%

In a traditionally low-margin, high tonnage business, such increases make a huge impact on earnings. In the junior sector in London, the two companies with direct exposure to the pacific (or Asian) seaborne market for hard coking coal are Western Coal Corp and Caledon Resources. If this agreed prices becomes the benchmark, we expect both Western and Caledon will see an annualised earnings boost of c. 140% on EBITDA and 170% on EPS. If higher contract prices are established over the long term, a 100% increase in the NPV valuations.

BUY WTN and CDN

On this news we re-iterate our Buy recommendations for these two coking coal producers, expecting them to perform well as further positive news-flow on prices is announced. On Western Coal Corp (WTN) we have a buy recommendation, and upgrade our target price to 300p. For Caledon Resources (CDN), we re-iterate our Strong Buy recommendation and 80p target price.

alano20

11th Apr '11

Acquisition: one step closer:

The parties are pleased to announce that GRAM has now received formal approval for the Potential Acquisition from the State-owned Assets Supervision and Administration Commission ("SASAC") on behalf of the Guangdong Province. GRAM is actively progressing approvals with the remaining Chinese regulatory authorities.

In light of this development, the parties are in discussion regarding a renewal of the Non-Solicitation Agreement.

Up almost 8%.

http://www.investegate.co.uk/article.aspx?id=201104110700146489E&fe=1

Caledon: is it worth US$1bn?

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Marben100

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China unlikely to return as net coking coal exporter

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