In November 2014, Peabody Energy (BTU) and Glencore Plc agreed to combine their two neighboring Australian mines in order to save costs in the current difficult environment. The move will minimize capital expenditure requirements and increase efficiency of operations. In another deal, Alpha Natural Resources (ANR) sold its Amfire mine in Appalachia to a small local producer.
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Apart from Westmoreland Coal Company’s acquisition of Sherritt International’s Canadian coal assets, we haven’t seen any large coal deals so far in 2014. Rio Tinto (RIO) and BHP Billiton (BHP) are rumored to have an interest in acquiring Walter Energy (WLT). BHP is also linked with acquisition rumors related to Peabody Energy (BTU). But both companies have so far denied the claims.
The coal industry is going through a tough time. Coal prices are near multi-year lows. Most coal stocks are down significantly since the start of the year due to various industry-wide issues, including competition from natural gas, regulatory complications, slowing growth in China, and oversupply.
If low prices persist for the next few quarters, some high-cost producers—as well as producers with unsustainably high leverage—may go out of business. If some coal producers stop producing, it will help the surviving producers. Lower supply may lift coal prices up, improving the fortunes of surviving coal companies. Valuations may go up as well.
So coal producers (KOL) offer an attractive strategic investment opportunity at the current valuations. However, weaker producers may not be a good buy target for acquirers. Deals may prolong the hardship the companies face.
In the end, the companies that will manage to keep their patience and finances in order until the end will emerge as winners. For now, a good time for the coal industry looks far away.