ANALYSIS-Coal mines attract cash-flush bargain hunters

ANALYSIS-Coal mines attract cash-flush bargain hunters
LONDON/HONG KONG, March 5 (Reuters) - Coal mines are at their most affordable for years but only a few cash-flush or state-backed buyers will be able to seize the opportunity.

The commodities boom driven by Chinese and Indian demand pushed coal and mine prices to record highs in 2008. Since then coal prices have fallen by 60 pct but analysts expect the next commodities boom in 3-5 years time will see an even sharper rise than in 2008. Buyers complained last year that sellers were over-valuing their assets by up to 50 pct but some still paid the premium.

"Q2, Q3 this year would be a very good time to buy a mine if you're looking to buy distressed coal assets. Even more so for thermal coal than coking coal," said Jim Lennon, executive director of commodities and mining research at Macquarie Bank.

"There would be strong interest even from the big miners in buying coal mines which are generating cash, have large reserves, close to ports with good logistics. But everybody is trying to conserve cash now," said a senior executive at a large mining house. "Raising funds is the rub. There are a lot of non-cash offers."

Xstrata Plc's $5.9 billion rights issue, approved on March 2, is a clear example of mining groups' drive to pay off debt, mining house sources said.

CHINA HAS THE CASH

Unlike the international listed miners, the Chinese and Indian buyers such as China's biggest coal miner Shenhua Energy (1088.HK: Quote, Profile, Research) an China Datang Corp (0991.HK: Quote, Profile, Research) are driven primarily by a long-term need to secure raw materials supply. Many of them are state-backed and have cash to spend rather than shareholders to placate. They often secure financing on political grounds. Hong Kong-based bankers say they are matching companies with balance sheet issues with cashed-up buyers.

Indian state entities such as Coal India have been seeking mines in Indonesia, Australia and South Africa for years. State utilities, Independent Power Producers (IPPs) planning import-fuelled so-called Ultra Mega Power Plants and Indian traders have also sought stakes in overseas mines.

India will import around 51 million tonnes of thermal coal in 2009 mostly from Indonesia, up from 42 million in 2006. This will continue to rise over the next decade as demand grows. "Indonesia is still wall-to-wall with Indian companies trying to buy smaller coal mines here," a senior Indonesian coal producing source said.