Coal isn’t dead; it’s a takeover target

Coal is cheap but far from finished.

Coal is not dead yet – not even the thermal stuff – but it’s cheap. No doubt about that.

A takeover bid was lodged with the Australian Securities Exchange at 10 am last Monday. It’s a cash offer – by a Dutch company listed on the Hamburg stock exchange to buy an Australian coal company, registered in the UK, whose assets are in South Africa – purportedly to be financed by another Dutch company controlled by a German entrepreneur via trustees in Jersey.

Don’t give up yet; it gets easier, although it does seem all too hard for the corporate regulators as the bidder, Dutch group Ichor, reckons its bid for the Australian company, Universal Coal, is neither bound by UK or Australian takeover laws. So, no finance is yet locked in, leaving shareholders in Universal Coal exposed.

The charming thing about this takeover though is the people behind it. The major shareholder in Ichor is Sapinda Holding, a company registered in Holland and controlled by rags-to-riches-to-rags-to-riches-again German entrepreneur Lars Windhorst,

Lars was once hailed “the German Bill Gates”. He was honoured in his homeland as a Young Global Leader. He is no longer so cherished in Germany, after two corporate collapses and a run of brushes with the law, and he now operates Sapinda from offices in London’s Saville Row.

His maiden crash, a computer company, came in the wake of the dotcom boom in 2004, and its sequel, the £400 million pound ($862 million) blow-up of investment group Vatas Holding, came in the aftermath of the global financial crisis.

Lars is nothing if not a survivor though. Between business bingles he had a plane crash, when his private jet went down in Kazahkstan in 2007, killing the pilot. Lars escaped with the loss of an ear.

After his second corporate collapse the resilient Lars then survived a criminal prosecution for fraud and embezzlement, settled by plea bargain in December 2009. He paid a £1 million fine and received a one-year suspended prison sentence.

That didn’t stop the Tories from accepting lavish donations from Lars, nor did it frustrate an endorsement from Lord Mandelson, the UK Labour politician nicknamed the “Prince of Darkness” and “Darth Labour”.

The “Wunderkind” has bounced back, again. In 2012, German magazine Der Spiegel reported he had raised $US3.5 billion ($4.9 billion) in two years. Now his eyes are fixed on ASX-listed Universal Coal.

If this were Universal Widgets rather than Universal Coal, the bid would be twice as high. Pre-bid it was trading at 14c. Post bid at 18c, for a market cap is $88 million; that’s for a coal producer, with long-term contracts with South African utility Eskom, making a guaranteed margin of $15 a tonne on 1.8 megatonne per annum production going to 3mtpa.

The Ichor offer values Universal on an EV-EBITDA multiple of 2.2x versus roughly 5x for a sector which is the most bombed out in the market. It may spit out $50 million in cash next year but its market value today is not even half that. Just shows you how cheap thermal coal is these days.

At its peak in 2009, the price ran to $120 a tonne. Last week, according to Platts Coal Trader, Australian thermal coal was down at a record low of $US55 a tonne, and with the forward curve dropping to $US52/t in 2018.

Coal optimists reckon we are in a cyclical downturn and the price will bounce. This writer is not among them, believing the commodity to be in structural decline. Still, demand will persist as long as there is value for investors, no matter how demonised the product.

Any investor reading last week’s Platts would have been depressed by the news. European coal forwards dropped below US$50/t. Platts quotes one buyer saying low-quality (energy content 3,000-3,500kcal) imported coal is now priced as low as US$19-21/t – competitive for the first time in a decade with Coal India Ltd’s average wholesale domestic coal price.

This is a bloodbath for exporters, but it is down to parity for India to import coal at spot prices versus producing their own. And it is intriguing that our governments are still backing Adani’s development of the Galilee Basin.

For Adani’s Carmichael coal, the 5,500kcal, 20 per cent ash benchmark is down to $US43.20/t. Adani would likely receive a $US6/t discount to this for lower 5,000kcal energy and the higher 26 per cent ash. This is way below its own model for gross cash break-even.

Incredibly, a recent report from Deutsche Bank forecast China will be an exporter of thermal coal by 2020, such is the swelling excess capacity.