Sherritt International (TSX: S) is firming up its balance sheet and putting itself in a position to take advantage of perceived low prices for non-coal mining assets.
To do so, it is selling its entire coal business for $946 million — with roughly half of that capital coming from Englewood, Colorado-based Westmoreland Coal (NASDAQ: WLB) and the other half coming from a group headed by St. John’s-based Altius Minerals (TSX: ALS; US-OTC: ATUSF).
The deal is one of the few to be applauded by the market on all fronts.
After Sherritt announced the move on Dec. 24, its shares closed up 9% at $3.88 apiece with 2.5 million shares traded. Altius shares closed up 12% to $11.93 on 110,000 shares changing hands. In New York Westmoreland shares finished up 5% at $17.37 with 205,000 shares traded.
The move is a dramatic departure for Sherritt from one of its core businesses. Sherritt has been one of Canada’s largest coal producers with 35 million tonnes of coal production in 2012.
But by generating a tidy sum for the assets, the company can better focus on its nickel and energy divisions, something that Sherritt’s president and CEO, David Pathe, emphasized during a conference call connected to the sale.
Pathe said the company is bullish on nickel prices longer-term and highlighted that the company has established a strong niche business in energy in Cuba, where it drills, produces and provides services to the industry in the country.
He said that while Sherritt will now be in a position to look at acquisitions in other base metals, it will do so with an eye towards not reducing its liquidity, and only after reducing its debt.
Indeed firming up the balance sheet was cited as the chief reason for the deal.
Sherritt finished the third quarter with $2.062 billion in debt.
Much of that debt was generated in connection with the construction of the massive Ambatovy nickel mine in Madagascar, in which Sherritt has a 40% stake in.
While the joint venture partners had been working to get the mine into commercial production by year-end, Pathe conceded that the timeline was not realistic and has been pushed into the first quarter of 2014.
As for how the loss of cashflow from the sale of the coal assets will affect the company’s dividend, Pathe warned that the payout could be in for a revision.
“It is a legitimate question whether paying a dividend at the current rate makes sense for us going forward,” he said.
In terms of who gets what in the deal, its key thermal coal mines in Alberta and Saskatchewan will be snatched up by Westmoreland, which already has six coal mines in Montana, Wyoming, North Dakota and Texas.
Westmoreland calls the transaction an “historic event” for the company, and says the seven coal mines it will acquire complement its existing operations and expertise. But history making events come with a price tag, as Westmoreland will pay $465 million, made up of $312 million cash and its taking $153-million worth of capital leases as part of the acquisition.
As for the other half of the sale, the assets are being bought for $481 million by a group headed by Altius.
The group will acquire all of the Sherritt’s coal royalties, as well its Saskatchewan coal and potash development projects.
Altius gets a 51% interest in a portfolio of 11 producing coal and potash royalties located in Alberta and Saskatchewan, while privately held Liberty Metals & Mining will take a 43% stake, and the remaining 6% going to another group of private parties.
Altius says it will fund $233 million of the $460-million price tag with cash on hand, of which it has $124 million, a bank loan for $80 million, and a $50-million worth of subordinated convertible debt from Sprott.
On top of the coal portfolio, Altius will buy Sherritt’s 50% interest in Carbon Development Partnership (CDP) for $21 million. The Partnership holds 7.2 billion tonnes of measured and indicated resources, and 2 billion tonnes of inferred potash resources in Saskatchewan.
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