Bargains on offer as mining mergers point to bottoming in coal prices
Given the positive outlook for coal in Asia, those with an appetite for risk and deep pockets may get some bargains among the flurry of asset sales
If you were looking for a sign that coal prices have finally bottomed out, then the ramping up of merger and acquisition activity is often a good indicator.
Just as major mining companies tend to buy assets at inflated prices at the zenith of the market, they tend to sell them at discounts at the nadir.
A flurry of announcements have hit the headlines recently, including Anglo American's proposed sale of coal assets in Australia and South Africa, and Peabody Energy and Glencore agreeing to form a joint venture at neighbouring mines in Australia's Hunter Valley basin.
The merger activity has not been limited to Australia and South Africa, with Brazil's Vale selling a stake in its Mozambique mine to Japan's Mitsui and Consol Energy saying it plans to pursue an initial public offering of some of its US thermal and coking coal assets.
Companies tend to use obfuscatory language in the announcements of these deals, often resorting to terms such as "unlocking shareholder value", but behind the spin is often the simple message that the assets are loss-making and the pain on the bottom line has become too much to bear, or if they are profitable, they are not providing enough return on capital.
Selling loss-making coal mines can provide some short-term relief to a company's balance sheet, even if the management of the firm believes in the longer-term story of the asset.