Xstrata expands Canadian-coal footprint with Peace River acquisition, agrees to joint venture with JX Nippon

Vancouver — Switzerland-based mining giant Xstrata PLC (XTA-L) has agreed to buy the Sukunka coking coal deposit in the Peace River region of northern British Columbia from Calgary-based Talisman Energy (TLM-T, TLM-N), in a cash-only deal worth US$500 million.

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 last October.

With the Sukunka acquisition Xstrata’s total land tenure in the Peace River region grows to 1000 sq.km.  

“Sukunka has the potential to be a high quality metallurgical coal mine,” Peter Freyberg, chief executive of Xstrata Coal, said in a prepared statement, “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 announced its intention to bolster company-cash liquidity by unloading non-core assets worth up to US$2 billion. Forty-five percent of Talisman’s production is 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 — forcing companies to sell units and scale back capital investments to cover cash shortages.

Paul Smith, vice president of Talisman’s North American operations, said the move highlighted 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 said.

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

The company said potential suitors for Sukunka began lining up last year, and reports by industry analysts’ suggest that Talisman scored well with the US$500 million asset price.

Analysts at Calgary-based CIBC World Markets Inc. had pegged the cash value of Sukunka at anywhere between US$300 million to US$500 million in reports to start the year.

 “Talisman Energy monetized its coal lease for approximately 4 per cent of its market cap — a meaningful contribution for an asset that nobody had placed value on.” CIBC analyst Andrew Potter said in a note to clients to start the week.

Canaccord Genuity research analyst Phil Skolnick also labeled the US$500 million price tag as being at the “top end” of what bankers had projected would be a likely price for the asset.

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

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

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

The move follows an announcement by Chinese Premier Wen Jiabao that the country is cutting its 2012 growth estimates from 8% to 7.5%. On March 10, 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 due to the debt crisis, slowing growth figures in China, and a dent in Japanese consumption triggered by complications arising from last year’s earthquake and tsunami disaster.

Spot prices for Australian coking coal dropped from $335 per tonne to $224 per tonne during February, according to analyst reports. Akira Kishimoto, an analyst for JP Morgan in Tokyo, reported 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 last week 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.” Yasushi Kimura, President of JX Nippon Oil & Energy, said in a company statement.

Kimura explained that JX currently focuses on the supply of thermal coal to utility companies, but has full-scale expansion plans to enter the hard coking coal business.