Colonial Coal $CAD.v Breaking News! –> No, still waiting…

M&A activity in metals & mining is increasing. On August 21st a merger between coal companies Arch Resources & CONSOL Energy was announced, creating a US$5B U.S. powerhouse. I would not be surprised to see BHP acquire Tier-1 coking coal assets outside of Australia.

Although the short-to-middle portion of the SGX Australian hard coking coal (“HCC“) futures curve has declined ~US$$80 to ~$50/t in the past 4-6 months, the long-end is down just ~$25/t. The monthly price from Jan. 2026 to Dec. 2028 is pinned at $207/t.

The high tick (spot price) in 1Q/22 was over $650/t! Steelmakers are okay paying US$175-$225/t but unhappy at $300+/t! And, look how many months were above $300/t from Sept. 2021 to Mar. 2024.

A company I’ve followed for 2.5 years is Colonial Coal (TSX-v: CAD) / (OTCQX: CCARF), a HCC-only play with two PEA-stage projects in western Canada. The Company has been trying to monetize its assets for nearly five years.

Please see prior articles on Colonial Coal–> June 13 / April 27 / March 20 / January 8.

Giant steel companies operating coastal blast furnaces should want to own HCC assets, especially world-class ones. Likewise, coal producers greatly benefit from securing long-lived HCC assets.

Not only can coal companies lock in decades of low-cost, high-quality products, at times selling at a profit of > US$200/t, they retain pricing power by preventing major steelmaking customers from obtaining Colonial’s 695M tonnes of HCC.

COVID-19 disrupted sales efforts, but it’s been well over a year since COVID was a thing. Why no transaction, no initial offer by any of 25+ prospective suitors?

No one knows. I argue that this drawn-out process allows investors to purchase shares that could double, triple, or even quadruple in the coming months. Yes, sounds too good to be true, right?

Asians are famous for thinking longer-term. However, time is not on the buyers’ side, at least not for those that badly need seaborne HCC in 5-10 years. Colonial’s board is experienced in dealing with Japanese, Korean, Chinese & Indian conglomerates.

On the board is Partha S. Bhattacharyya, a foremost expert in all things India & coal. Presumably, he’s advising the board to stay the course, not to signal impatience.

I think everyone agrees there’s potentially significant upside here. How about the downside? Even if the assets are sold for what I believe would be a fire sale price of US$0.50/t, shareholders at today’s C$2.49/shr. would not lose a penny as the assets are currently valued at just US$0.48/t.

The most promising news this year is that Citigroup is now leading the sales effort

CEO David Austin says this Citigroup, a major investment bank, is doing a good job identifying new suitors and helping existing parties conduct due diligence. I believe Citi would not have bothered with this mandate unless it expected to close a deal this year.

Presumably, Citi thought it had buyers from day 1, so why no action? Citi has to formulate bids and help conduct & facilitate due diligence with existing + new clients. It needs to travel around the world meeting prospective suitors. It’s likely advising some groups to team up to mount a bid.

There’s a turnaround time for reports & follow-up meetings. The Bank might also be working on financing packages. In my view, owning shares in Colonial over the next several months offers a compelling risk/reward proposition. And, yes, I have said that before! This time we have Citi on our side.

Colonial has 695M tonnes of resources, (not reserves), and 94% of the tonnage is high-quality HCC. Numerous comparable transactions at US$2+/tonne are supportive of a much higher valuation, but the comps are problematic as many date back over a decade, and most involve producing or past-producing operations.

Above are summaries of the two PEAs, with a combined post-tax NPV(7.5%) of C$2.34B (at today’s FX rate), and HCC prices of US$160.5 & $174/t. All else equal, the combined NPV would be C$3.5B using US$225/t coking coal & assuming +20%/+30% increases in [both op-ex/cap-ex] at Huguenot & Flatbed, respectively.

If acquired by a much larger company, a 6% discount factor could be applied, increasing the C$3.5B figure by 40% to C$4.9B. Thus, at a total cost of < C$3B, spread over 4-6 years, a buyer get assets worth C$4.9B [in today’s dollars] (assuming a 6% disc. rate, a long-term HCC price of US$225/t and the higher op-ex/cap-ex assumptions).

Western Canadian coking coal companies, private & public (cross out Teck)…

Colonial’s projects are at least four years from production and will take several more to fully ramp up, but there are few comparable assets in Western-friendly locations of this size & quality.

Acquirers face numerous permitting & environmental challenges, but a well-funded group should be able to move forward with CEO Austin’s & COO John Perry’s invaluable, and ongoing (post-transaction) guidance.

Austin & Perry have developed & commercialized HCC mines in B.C., Canada, and have solid relationships with First Nations. There are several other seasoned execs, please see the bios above. Culminating in April 2011, Austin developed, permitted, funded, and put into production, then sold Western Coal for C$3.3B.

The seaborne HCC market is critical to the Colonial story. In the above chart, Australia is counted upon to continue delivering HCC growth through 2050. Demand is expected to rise by +1.6%/yr., surely supply can keep up? Not necessarily.

Australia’s main exporters (BHP, Glencore & Anglo American) have been hit with a perfect storm of constraints, bottlenecks, and cost/labor pressures. Consider what BHP said on a recent earnings call,

“Queensland’s royalties are set at extremely high levels. Combined with income taxes, our effective tax rate in Queensland of 62% this (fiscal) half (year) makes Queensland so unattractive and risky compared to other investment opportunities that we simply cannot allocate any growth capital to this state…”

Wow, that’s brutal. In addition, complex & burdensome tax regimes + increased environmental scrutiny make obtaining permits more challenging. Instead of growth, over the past seven years to 2023 coking coal exports are down -20%!

Meanwhile, Indian demand for HCC imports is growing +5%/yr. The Peace River Coalfield (“PRC“) hosts Colonial’s assets, see the above map. The PRC is critically important to the global seaborne HCC market.

Top-decile quality seaborne HCCs from Australia & western Canada will be the last ones standing as less efficient, more polluting, lower-quality PCI, semi-soft, and high-vol coking coals are retired.

In the following image, western Canadian HCCs like Teck’s, –> now Glencore’s –> are in the top-right cluster of the world’s very best HCCs. These offer the optimal flexibility with regard to blending.

Besides Australia, perhaps only western Canada has the tonnage potential, transport capacity, and seriously high-quality HCC to keep up with India’s demand as it plans to double steel production from 2023 to 2030.

Although China’s imports of coking coal have waned in recent years, BHP believes demand for the highest-quality HCCs will rise, even as lower-quality products flatline or decline.

To get an update, I spoke with Mr. Austin in the week ended September 13th.

The board is happy with the job Citi is doing. Citi effectively has as long as it needs to facilitate a transaction, even if beyond six months. I asked if any countries were out of favor with Trudeau’s administration. He mentioned “silly tariffs” against China, but overall the geopolitical scene is calm.

Several countries are neck & neck in a horse race to possibly make a bid. Besides Canada, there’s the U.S., India, China & Australia, and David won’t rule out Japan, Korea, Taiwan, Thailand & Indonesia stepping up. Bidders might team up, possibly across countries.

I asked if India’s seaborne demand is overstated given announcements about domestic growth initiatives. He laughed, “India has been talking about meaningfully increasing production for decades. If it were feasible, it would have been done.”

Even if India produces more coking coal, much of its endowment is not top quality HCC like Colonial’s, and there are rail/truck bottlenecks in shipping 500-1,000 km to coastal blast furnace complexes. It’s far easier for India and for most of Asia to import seaborne HCC.

I asked about Mongolia coking coal going to India. He said proposed volumes are tiny, just 16,000 tonnes, and the distance, complexity & cost of going from Wuhan, China to Kolkata (Calcutta), India was deemed unfeasible by Chinese coal companies — yet Mongolian mines are an additional 1,000+ km away.

Regarding commodity traders, companies like Sumitomo, Mitsui & Co., Mitsubishi Corp., ITOCHU, Sojitz, Traxys, Trafigura could be interested in bidding. David repeated that > 25 NDAs are signed. He thinks roughly 15 might have serious interest.

On setting a fixed date to start an auction process, the board is open to that idea. It sounds like the board understands something has to happen, but I don’t know if that means in a few months or a few quarters…

Readers are reminded of the last time Mr. Austin sold a HCC company, (Western Coal). The stock languished until multiple bids came pouring in, causing the price to soar. Will we see the same with Colonial Coal? Who knows, but the chances are not small that this ends quite well.