Severstal Resources, one of Russia’s largest producers of iron ore and coking coal and a division of Severstal (LSE: SVST), plunked down US$877 million in 2008 to buy PBS Coals, a privately held company in southwestern Pennsylvania with assets in the northern Appalachian coal fields. But now, it is selling its PBS division to Corsa Coal (TSX: CSO) for just US$60 million in cash.
PBS Coals has two modern preparation plants and produces metallurgical coal from three active deep mines in Somerset County, Pa., less than 16 km from Corsa’s Wilson Creek met-coal mines.
The coal mines are within 274 km of the Baltimore port and have access to the CSX and Norfolk Southern Railway.
Corsa says the acquisition corresponds with its existing operations in Pennsylvania and creates synergy and marketing opportunities.
The PBS acquisition brings with it a large permitted base of globally scarce low-volatile met coal, complementary infrastructure, proximity to the largest met-coal buying region in the U.S., a low capital-intensity organic growth pipeline with an attractive cost structure, and assets acquired at a low point in the commodity cycle, Corsa says.
The company argues that the acquisition allows it to take advantage of the current bear market for met coal, a sector in which benchmark prices over the last three years have dropped by more than 50%.
According to an investor presentation by Corsa, current coal prices are below the marginal supply cost curve, resulting in a lot of unprofitable global seaborne production.
On a conference call, George Dethlefsen, a director of Corsa and managing director of Quintana Capital Group, described the acquisition as “transformative” and said Corsa was acquiring “excellent assets at an attractive price.”
He added that “current met-coal prices are unsustainably low . . . with the right team in place . . . we believe this [acquisition] positions us well to benefit from the cyclical recovery in the met-coal market.”
Corsa points out that China and India lack met-coal reserves (particularly premium-quality low- and mid-volatile coal) and have built their largest and most modern blast furnaces on the coast owing to their increasing reliance on seaborne coal imports.
In addition to the US$60-million price tag for the PBS assets, Corsa will assume reclamation and water-treatment liabilities totaling another US$60 million.
Corsa is raising US$65 million through a non-brokered private placement at 15¢ per share, with another US$25 million coming from a non-revolving term credit facility underwritten by Sprott Resource Lending Partnership.
Sprott Resource Corp., through Sprott Resource Partnership, is buying 237 million shares in Corsa for a total of US$33.2 million. (Sprott Resource previously invested in PBS Coals in 2007, before it was acquired by Severstal.)
QKGI New Holdings (New QKGI), a current shareholder and affiliate of Quintana, will acquire 141.8 million shares for a total of US$20 million.
Zebra Holdings and Investments and Lorito Holdings — two corporations controlled by the Lundin family trusts and current shareholders — are acquiring 70.9 million shares for a total of US$10 million.
Bank Julius Baer will acquire 14.2 million shares for a total of US$2 million.
After the acquisition, 83% of Corsa’s outstanding shares will be held by Quintana Capital Group (55%), the largest private holder of coal reserves in the U.S.; Sprott Resource Corp. (17%); and the Lundin family (11%).
On the conference call, Steve Yuzpe, Sprott Resource Corp.’s’s president and CEO, again emphasized that the deal’s timing is good: “It allows us to deploy capital counter-cyclically into an out-of-favour industry, with potential to create tremendous value over time as met coal recovers.”
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