Employees work on a pile of coal gangue in Huaibei, Anhui province, September 17, 2013.Reuters
The team behind Corsa Coal Corp., which just agreed to buy PBS Coals for $60-million (U.S.), expects to buy more coal mines from struggling rivals in a countercyclical play on fuel for steel mills.
Corsa is made up of many of the former managers of PBS Coals, and it is backed financially by some of the original investors in PBS. Those include Canada's Sprott Resource Corp. and the Swedish-Canadian Lundin family, which both put up money to help finance the PBS sale.
Corsa had been expecting the owner of PBS, Russian steelmaker Severstal, to put the coal miner on the market. Back when the Russians bought PBS six years ago, the push was on to become vertically integrated and to ensure there was a steady supply of coal for making steel. These days, the trend is running the other way and coal prices are slumping. Add to that the fact that relations between Russia and the U.S. are tense, and Severstal decided to sell PBS even though it would mean taking a big loss.
"It was our intention to be well positioned when the Russians finally threw in the towel on this asset, and that came sooner than we thought," said George Dethlefsen, a member of Corsa's board and a managing director at Quintana Capital Group, another of Corsa's big investors.
With the PBS assets in hand, Corsa will look to keep buying. There are lots of mines on the market from distressed coal producers and steelmakers that no longer want to be vertically integrated, he said.
"Now is an extraordinary time in our view to be on the acquisition trail," said Mr. Dethlefsen. Other coal producers that made top of the market acquisitions are struggling with debt, and many investors won't touch the sector because of the tough pricing for all types of coal, so he expects limited competition for mines.
"We feel we have the opportunity and financial flexibility to continue to grow," he said. "We do believe in creating economies of scale."
Steve Yuzpe, head of Sprott Resources, said his belief is that pricing for metallurgical coal is near a trough, citing negative sentiment, cutbacks in production and mine closures.
In addition, the backers cited the fact that the mines PBS and Corsa own are close to major steel making markets in the northeastern U.S. and Canada. With the U.S. economy recovering, they believe there is scope for an improved market for metallurgical coal.
"We're buying at a trough, so if it moves back to average prices – nothing spectacular – it should be a really great investment for all particpants," Mr. Yuzpe said.