In 2008, Severstal Resources, one of Russia's largest producers of iron ore and coking coal and a division of OAO Severstal (LSE: SVST), plunked down US$877 million to buy PBS Coals, a privately held company in southwestern Pennsylvania with assets in the northern Appalachian coal fields. Today the Russian company is selling its PBS division to Corsa Coal Corp. (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, Pennsylvania, less than 16 km from Corsa's Wilson Creek metallurgical coal mines. The coal mines are within 274 km of the Baltimore port and have access to key rail transportation (the CSX and Norfolk Southern Railway).
Corsa says the acquisition dovetails nicely 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 says the acquisition allows it to take advantage of the current bear market for metallurgical 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 significant portion of the global seaborne production being unprofitable.
On a conference call, George Dethlefsen, a member of Corsa's board of directors and managing director of Quintana Capital Group, described the acquisition as "transformative" and said Corsa was acquiring "excellent assets at an attractive price."
"Current met coal prices are unsustainably low," he added. "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 also points out that China and India lack metallurgical coal reserves (particularly premium quality low and mid volatile coal) and have built their largest and most modern blast furnaces on the coast in anticipation of their increasing reliance on seaborne supply.
In addition to the US$60 million price-tag for the PBS assets, Corsa has agreed to assume reclamation and water-treatment liabilities totaling an additional US$60 million.
Corsa says it is raising about US$65 million through a non-brokered private placement at 15¢ per common share and another US$25 million will come from a non-revolving term credit facility underwritten by Sprott Resource Lending Partnership.
Sprott Resource Corp., through Sprott Resource Partnership, has agreed to purchase 236.96 million shares in Corsa for a total of about US$33.2 million. (Sprott Resource previously invested in PBS Coals in 2007 before it was acquired by OAO Severstal in 2008.) QKGI New Holdings (New QKGI), a current shareholder and affiliate of Quintana, will acquire 141.78 million shares for a total of US$20 million, and Zebra Holdings and Investments S.a.r.l. and Lorito Holdings S.a.r.l., two corporations controlled by the Lundin family trusts and current shareholders, have agreed to acquire 70.89 million common shares for a total of US$10 million. In addition, Bank Julius Baer will acquire 14.17 million shares for a total of US$2 million.
Following the acquisition, about 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 president and chief executive officer, said the transaction was exciting because "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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