Sherritt, teachers eye Fording Coal

The Sherritt Coal Partnership II, an alliance between Sherritt International (S-T) and the Ontario Teachers’ Pension Plan, has launched $1.5-billion takeover bid for Canada’s largest export-coal producer, Calgary-based Fording Coal (FDG-T).

The partnership is offering $29 for each of Fording’s 51.3 million outstanding shares. The offer represents a 25% premium over Fording’s average closing price for the 20 days prior to the offer. The offer will remain open for 60 days and is subject to at least 66.67% of Fording’s outstanding shares being tendered.

The Pension Plan already has a 6.2% stake in Fording.

Fording mines coal in British Columbia and Alberta and supplies steel makers and electric utilities. The company, along with four others, was spun off from former conglomerate Canadian Pacific (CP-T) last October.

Under the proposed deal, Sherritt and the Teacher’s Pension would also assume around $128 million worth of debt racked up by Fording bringing the deals’ value to more than $1.6 billion.

Fording has recently twice warned of lower-than-expected third-quarter sales. In July shipments forecasts were lowered to 15 million tonnes from 15.7 million; another million tonnes were chopped in late September. The company cited the loss of a contract to Turkish buyers and lower volumes under other contracts. The company is due to release results for the period on Oct. 24.

Fording posted net earnings of $22 million (43 per share) for the second quarter, down from $31 million (59 per share) a year earlier. Revenue slipped to $236 million from $283 million. For the first half, net earnings were $39 million (76 a share) on revenue of $457 million, compared with year-ago earnings of $44 million ( 84 2 a share) on $526 million. The decrease is attributed to lower metallurgical sales volumes.

Earlier this month, Fording beat out the partner’s jointly owned Luscar Energy Partnership for a 5-year contract to operate TransAlta’s Whitewood and Highvale mines in west-central Alberta, about 65 km west of Edmonton. The contract is to supply around 15 million tonnes of coal annually beginning next January. Fording had already been operating the Whitewood mine on a contract basis since 1986.

Sherritt chairman Ian Delaney told the audience of a brief conference call, “Driving our decision here is our expectation that there are large economies to be extracted from combining the assets of our respective coal operations.”

The assets are in contiguous locations in British Columbia’s Elk Valley.

“We believe that on the metallurgical side of the business there is room for an income trust, which we hope to articulate in the offering circular, which we will publish later this week,” he added.

The partners plan to offer Fording shareholders certificates exchangeable for income fund trust units for all or a portion of their Fording shares.

In a similar move last year, Sherritt and the Teacher’s Pension Plan teamed up to acquire coal producer Luscar coal for about $1 billion. The deal gave Sherritt control of 11 coal mines, mostly steam-coal and lignite producers in western Canada.

During the second quarter, Luscar helped more than double to $73.4 million revenue generated by Sherritt’s coal business. Overall, Sherritt posted markedly improved second-quarter net earnings of $24.6 million or 15 per diluted share. For the first half of the year earnings tallied to just under $47 million (28 per share) on revenue of $402 million, compared with a profit of $37.3 million (25 per share) on $261 million in the first half of last year. The coal business contributed $106.1 million in revenue.

Shares of Sherritt were off 12 at $4.12 in late trade in Toronto, while Fording shares soared $5.50 or more than 21% to $31.49 in heavy action.