Xstrata expands Canadian coal footprint

Swiss-based mining giant Xstrata (XTA-L) has struck a deal to buy the Sukunka coking coal deposit in northern B.C.’s Peace River region from Calgary-based Talisman Energy (TLM-T, TLM-N) for a cool US$500 million in cash.

The move augments Xstrata’s growing presence in the Peace River coalfield following its US$153-million acquisition of First Coal last July and its US$40-million purchase of Cline Mining’s (CMK-T) Lossan deposit in October. 

With the Sukunka acquisition, Xstrata’s total land tenure in the Peace River region will grow to 1,000 sq. km.

“Sukunka has the potential to be a high-quality, metallurgical coal mine,” says Peter Freyberg, chief executive of Xstrata Coal. “Once developed, Sukunka would meaningfully increase our exposure to hard-coking coal.”

The Sukunka deposit is 60 km south of the town of Chetwynd, and has a measured and indicated coal resource of 236 million tonnes.

In January, Talisman said it intended to bolster its cash liquidity by unloading non-core assets worth US$2 billion. Talisman’s production is 45% natural gas, and tight cash conditions have become par for the course in the natural gas sector. Prices for the commodity are the lowest they have been in a decade, which is forcing companies to sell units and scale back capital investments to cover cash shortages. 

Paul Smith, vice-president of Talisman’s North American operations, says the move highlights the company’s focus on core and material assets. “Unlocking the value from the divestment of this coal property will provide funds to support the objectives announced in our 2012 guidance,” he says.

Talisman intends to cut capital expenses this year by 12%, or down to $4 billion, to try to make up ground lost to lower asset prices and a series of non-cash-generating pilot projects.

The company says suitors for Sukunka began lining up last year, and reports by industry analysts suggest that Talisman scored well with the US$500-million price. For instance, CIBC World Markets analysts  had pegged the cash value of Sukunka at between US$300 million and US$500 million to start the year. 

 “Talisman Energy monetized its coal lease for approximately 4% of its market capitalization — a meaningful contribution for an asset that nobody had placed value on,” says CIBC analyst Andrew Potter.

Canaccord Genuity research analyst Phil Skolnick also labels the US$500-million price tag as being at the “top end” of what bankers  and brokers had projected. 

Xstrata, one of the world’s largest thermal coal producers for power plants, continues to expand its asset base in the commodity under the shadow of an upcoming merger with major Swiss-based trading house Glencore International (GLEN-L). 

Earlier in March, Xstrata received preliminary environmental permits for its Donkin coal mine, located in Donkin village on Cape Breton Island. The company owns 75% of the project in a joint-venture agreement with Erdene Resource Development (ERD-T), and if all goes smoothly in the permitting stages, the partners expect production to begin in mid-2014. 

Expansion of its Canadian coal reserves will grant Xstrata better access to major industrial metallurgical coal consumers across Asia and Europe. 

The move follows Chinese Premier Wen Jiabao’s announcement that the country is cutting its 2012 growth estimates from 8% to 7.5%. China reported its largest monthly trade deficit in the last 22 years, with February exports increasing 18% year-on-year and imports gaining 40% over the same period.

Coal producers have experienced a triple-pronged attack on price stability, including declining European demand owing to the debt crisis, slowing growth figures in China and a dent in Japanese consumption triggered by complications from last year’s earthquake and tsunami disaster. 

Spot prices for Australian coking coal dropped from US$335 per tonne to US$224 per tonne in February, according to analyst reports. Akira Kishimoto, an analyst for JP Morgan in Tokyo, reports that spot prices could struggle for the next two to three months before rising on the back of escalating mining costs.

Japanese ambassador to Canada Kaoru Ishikawa said in an interview with The Globe and Mail that the country is interested in increasing its reliance on imports from Canada’s resource sector, primarily coal and natural gas.

On March 13, Xstrata announced a joint-venture agreement with private Japanese energy company JX Nippon Oil & Energy (JX). The agreement — worth US$435 million — entitles JX to a 25% stake in Xstrata Coal British Columbia (XCBC), which incorporates all of the Peace River holdings. The two most advanced XCBC projects, Sukunka and Suska, have combined production numbers projected at 9.5 million tonnes per year. 

“This opportunity has great significance for JX as it marks our entry into the hard-coking coal market,” says Yasushi Kimura, president of JX Nippon Oil & Energy. Kimura explained that JX is focused on supplying thermal coal to utility companies, but has full-scale expansion plans to enter the hard-coking coal business.