When Alabama, U.S.A.-based Walter Energy Inc. (NYSE:WLT) closed on its purchase of Western Coal Corp. in March of 2011, it seemed like a dream deal. With China clamouring for the type of metallurgical coal that Western Coal – Canada’s third-largest coal producer – digs out of three northern British Columbia mines, analysts saw the $3.3 billion purchase as a way for Walter to grab a major stake in an accelerating international market.
As coal spot prices hit highs of US$350 per tonne early in 2011 – up from US$225 a year earlier – many expected prices to go even higher due to intense demand from China’s steelmakers.
Western Coal’s mine locations allow easy access to Asian markets through the Port of Prince Rupert.
Walter’s offer of $11.50 for each Western share – a 26% premium – won unanimous approval from the boards of both companies and sparked a price rally in Walter Energy’s share price, driving it north of US$147. Walter had earlier locked up 19% of Western shares in a purchase from U.K.-based Audley European Opportunities Master Fund Ltd., Western’s largest shareholder, and had to fend off other bidders.
“Walter was not the only company looking at Western,” said equity analyst Robin Kozar of RBC Capital Markets, which acted as an adviser to Western during the takeover of Western, Canada’s fastest-growing coal producer.
With its Wolverine, Willow Creek and Brule mines operating near Tumbler Ridge and Chetwynd, Western has capacity to produce 3.7 million tonnes of coal this year and 5.7 million tonnes in 2013. When combined with Walter’s reserves in the Appalachian area of the southern U.S., the merger created the world’s largest publicly traded metallurgical coal company.
“This is a transformative transaction at a time when global demand for metallurgical coal is surging,” Joe Leonard, interim chief executive officer of Walter Energy, said at the time. “Western Coal has an attractive high-quality metallurgical coal asset base and has embarked on an organic growth strategy that is expected to increase production more than 60% by fiscal 2013.”
Changing times
But that was then.
Today, Walter Energy is itself being touted as a takeover target after losing more than half its value in the past year following a crash in coal prices due to slowing demand in China, oversupply, and competition from cheap natural gas. As well, Walter’s CEO quit just three months into the job, and the company earnings fell short of projections.
“Things for Walter have not panned out as planned,” Kozar said in an understatement.
Priced at $57.24 a share as of press time, Walter is selling for around nine times earning, less than any other major North American coal-mining company, according to a Bloomberg study, which labelled Walter “the industry’s cheapest stock.”
Even Walter is not bullish on the short term.
“Revenue and profitability will be disappointing” in the first quarter, due to flat sales and weaker coal prices, said new Walter CEO Walt Scheller. He said Walter plans to cut production by 35% at its largest West Virginia mines but will increase production in its northern B.C. mines.
“We continue to take steps to optimize production at our highest-margin mines to help offset weakening global metallurgical coal prices,” Scheller said.
Coal prices falling
Prices for metallurgical coal are forecast to fall from the current $211 per tonnne to $200 per tonne by next year and to as low as $160 within three years, according to Kozar, who is among those who see Walter Energy on the takeover radar.
“I would not be surprised,” Kozar said. “It is an opportunistic moment.”
While Walter Energy’s stock has fallen, its metallurgical coal from B.C. is considered among the best in the world because it’s purer and has a so-called higher heat rate, making it desirable for steelmakers.
Potential giants who may be looking at Walter include Anglo American PLC (OTC:AAUKY.PK), BHP Billiton (NYSE:BHP) and possibly Vale S.A. (NYSE:VALE), analysts say. •
