The saga of PBS Coals and its Russian owners is a case of what not to do in business.
Russian steelmaker OAO Severstal's six-year detour into the North American coal business is looking very costly. The Russians bought near the top and are now selling PBS Coals at multi-year lows for steelmaking coal.
From the Canadian side, it's looking a little rosier. Much the same group of mining financiers that sold PBS Coals to Severstal for $877-million in 2008 is now backing the repurchase of PBS for $60-million (U.S.). Sprott Resource Corp. and the Swedish-Canadian Lundin family, the original investors in PBS, are putting up $33-million and $10-million respectively to back the purchase of PBS by Canadian-listed Corsa Coal Corp.
If there's any good news here for Severstal it's this: At least it didn't pay the original price of $1.3-billion that had been on the table for PBS in 2008. PBS was a hotly anticipated candidate for a big initial public offering on the Toronto Stock Exchange, before Severstal showed up with a takeover bid. With the world economy hopping, steel companies were looking to lock up supplies of coal to feed their mills.
Then came the crash. As the world's economy tanked later that year, the deal between Severstal and PBS hit a snag. The big investors in PBS at the time, including Sprott and Lundin, agreed to a price cut for their shares to get the takeover done. (Other shareholders still got full price.) Because Sprott and Lundin were early investors in PBS, they still made huge profits, and given what PBS is now worth, it's clear that taking less to get the deal done was a solid call.
PBS has three mines in Pennsylvania, which produce coal that's used in steelmaking. Corsa has two mining sites of its own in the U.S., one which produces coal for steelmaking and one which produces coal for heating and industrial use.
Severstal is saying that the the business doesn't fit in operationally with its steel plants in Russia and the U.S. And coal prices are in a huge slump. So the Russians are going, while the original investors are stepping back in to take the countercyclical bet.
Editor's note: A version of this article previously published online stated that PBS Coals was sold to Severstal for $747-million in 2008. In fact, it was $877-million.