The small 11% premium that Whitehaven Coal is offering for Aston Resources shows just how worried the market is about slowing commodity demand from China

12/13/2011 6:00 pm EST


Jim Jubak

Founder and Editor,

The boom in merger and acquisitions in Australia’s coal industry goes on with the most recent deal—Whitehaven Coal’s bid to acquire Aston Resources—pushing the global total for deals in 2011 to a record $40.3 billion from $36.7 billion in 2010. But prices aren’t nearly what they were a year ago. I think that’s a reaction to the huge run up in the valuation of coal companies in 2010 and 2011. And to worries that demand for coal from China might be about to drop.

Even if you don’t own shares of either acquirer Whitehaven Coal ((WHITF in New York or WHC in Sydney) or acquiree Aston Resources (AZT in Sydney), the meager 11% premium in the deal tells you a metric ton about how industry insiders feel about the near term future of their sector.

In the deal Whitehaven will pay Australian dollars $2.72 billion ($2.77 billion U.S. dollars) in stock for Aston Resources. That comes to an 11% premium on Aston’s December 9 closing price in Sydney, well below the average 21% premium on coal deals this year. The deal values Aston at 2.14 times the company’s asset value. Again that’s below the 3.06 in seven comparable deals, Bloomberg calculates. Aston shares haven’t rallied on the offer, suggesting that nobody expects another bidder to emerge.

The big prize in the deal is Aston’s Maules Creek project, which is just 20 kilometers down the road from Whitehaven’s Narrabri North mine in New South Wales. Maules Creek is scheduled to start producing coal in the second quarter of 2013 with output climbing to 10 million metrics tons of coking coal for steelmaking in 2014. That will put Whitehaven on track to doubling production by 2016.  BHP Billiton, Australia’s biggest coal exporter, has forecast that global seaborne demand for coking coal will climb by an average of 5% a year through 2025.

The modest 11% premium in this deal is an indicator of how nervous the coal industry is about the potential for falling demand from China. But that’s a fear shared across the mining sector no matter the commodity being mined. The price of the mining company shares that make up the Bloomberg World Mining Index is down 28% in 2011. Since the Thomson Reuters/Jefferies CRB Index of 19 commodities is down only 9% this year, stock prices look to be discount a further drop in commodity prices.

The drop in the price of an acquisition makes this an attractive time to buy for big coal companies looking to bulk up for the inevitable turn in the demand cycle—and for investors willing to wait for a deal to materialize. Next potential target in Australia is probably New Hope (NHPEF in New York or NHC.AU in Sydney.) The company is now Australia’s second largest coal miner.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Whitehaven Coal as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at



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