Western Canadian Coal mulls 'a number' of takeover offers

$1.5B Market Value

Peter Koven, Financial Post
Published: Thursday, June 19, 2008

If any company embodies the unprecedented mania in the coal market, it is Western Canadian Coal Corp.

It was just last November that the Vancouver-based coal producer teetered on the brink of bankruptcy protection after violating a financial covenant. It was suffering because of low coal prices, operational problems and the strong Canadian dollar.

"As a young company and a start-up, there is nothing that cannot be overcome," chief executive John Hogg confidently told the Financial Post at the time.

He ended up being more right than he could have ever imagined.

After a bailout from an investment fund and a tripling of coking coal prices, Western Canadian now boasts a market value of more than $1.5-billion, and the company revealed yesterday it has received "a number" of takeover proposals for all or part of the company. The offers emerged from a strategic review that Western Canadian started last year.

The news drove the red-hot stock up another 22% to close at a record high of $10.60. That capped off a meteoric rise from 50¢ last November that ranks among the fastest in mining history.

Sources pointed to a number of potential buyers of Western Canadian: Anglo American PLC, Cambrian Mining PLC, or a big Asian steelmaker looking to secure supply. There are also rumours that Western Canadian could merge with Grande Cache Coal Corp. to create a mid-tier coal company with more scale.

But the company that holds the strings is Cambrian, as it owns more than 40% of Western Canadian's shares and could be a buyer or seller. Cambrian previously expressed an interest in selling its stake for the right price, but could decide to buy instead.

Of the big mining companies, Anglo is considered the most logical buyer as it is already in a joint venture with Western Canadian called Belcourt Saxon.

"They're a big player and they're already in the neighbourhood," said Mike Plaster, an analyst at Salman Partners.

The big Asian steelmakers are also viewed as possible buyers because they are looking to secure supply in a very tight market. They need the coking coal to fire the blast furnaces that produce steel. ArcelorMittal, the world's

biggest steelmaker, recently bought a minority stake in Australian coal producer Mac-Arthur Coal Ltd., triggering a potential takeover battle for the company amongst rival steelmakers. Investors are hoping for a similar scenario with Western Canadian.

"It's almost like there's a war to get supply of important raw materials. If something comes up for sale, [the steelmakers] are all over it," said Jean-Francois Tardif, a portfolio manager at Sprott Asset Management (a big Western Canadian shareholder).

However, experts noted Western Canadian's price tag has gone up so much over the past six months that it could easily deter a takeover bid for all or part of the company. It would ultimately come down to how confident a buyer is about the future of the coal market, and about Western Canadian's ability to ramp up production. The company plans to more than double annual production over the next few years to seven million tonnes. But it has faced operational problems.

Coal prices more than tripled for the 2008 fiscal year after flooding in Australia curtailed production. That tightened up the market enough that coking coal producers were able to negotiate prices with customers that are roughly triple 2007 levels. That has sent shares of Western Canadian, Grande Cache and Fording Canadian Coal Trust soaring higher.

pkoven@nationalpost.com