ArcelorMittal buys Macarthur coal stake

Wednesday, May 21, 2008

ArcelorMittal, the world's biggest steelmaker, bought a 14.9 percent stake in Australian coal producer Macarthur Coal Ltd. and wants talks that may lead to a takeover valued at a minimum of A$4.2 billion ($4 billion).

The Luxembourg-based company paid A$20 a share for the stake, 8.8 percent more than yesterday's closing price, Brisbane-based Macarthur said today in a statement. Macarthur, which rose as much as 14 percent in Sydney, today ended talks with another unidentified potential bidder.

ArcelorMittal wants Macarthur, the world's biggest maker of pulverized coal used by steelmakers, to secure raw materials after a tripling in coking coal prices this year. Xstrata Plc, the biggest exporter of power station coal, is in talks with Macarthur, the Wall Street Journal said May 2.

``There are a lot of parties interested in acquiring the group,'' Andrew Driscoll, a Hong Kong-based analyst at CLSA Ltd., said today in Singapore. ``There's very few steel mills actually globally that have much sufficiency in coking coal.''

Macarthur climbed $1.47 to A$19.85 at 3:45 p.m. in Sydney on the Australian stock exchange, giving it a market value of A$4.2 billion. The stock, which is trading at 79 times estimated earnings, has risen 31 percent since the company said April 21 it had been approached about a possible transaction.

A coal producer may pay as much as A$24.25 a share, or A$5.1 billion, for Macarthur taking into account potential cost savings of A$20 million a year, UBS AG said in a report yesterday.

ArcelorMittal paid A$632 million for its 14.9 percent stake, which is just under the 15 percent holding that would require approval from Australia's Foreign Investment Review Board.

Nippon, Vale

Global steelmakers including Nippon Steel Corp. are seeking to invest in producers as well as mines to lock in long-term supplies. Nippon Steel wants to invest in Cia. Vale do Rio Doce's $1.4 billion planned coal mine in Mozambique, the company said yesterday. Macarthur Coal's pulverized coal is used by steelmakers as a cheaper alternative to coking coal.

``Everybody who wants to be in the game would want to be as self-sufficient as possible,'' said Alfred Wong, a senior portfolio manager at Unifund in Hong Kong. ``Australia appears to be quite a natural place, they have got good mines, they have got a good workforce, they have got a good government.''

There have been $57 billion mining and energy takeovers this year in Australia, the world's No. 1 exporter of iron ore, coal and alumina, compared with $29 billion in 2007, according to Bloomberg data. Xstrata bought Australian coal producer Resource Pacific Holdings Ltd. for A$1.1 billion this year.

Macarthur is being advised by JPMorgan Chase & Co.

Possible Buyers

Xstrata, Anglo American Plc and Vale may benefit from buying Macarthur, Sophie Spartalis, an analyst at Macquarie Group Ltd., said last month. Other possible buyers include Noble Group Ltd. and shareholder Citic Group, backed by the Chinese government, UBS analysts led by Sydney-based Glyn Lawcock said.

ArcelorMittal, formed in 2006 after billionaire Lakshmi Mittal's Mittal Steel Co. bought Arcelor for $38.3 billion, became the third-biggest shareholder in Macarthur.

The A$20 price is at the ``high end'' of recent transaction multiples, which have been completed at between 9 and 10 times future earnings, UBS' Lawcock said in the report.

Macarthur's largest shareholder is founder Ken Talbot, followed by Citic, which holds 17.66 percent, and is considering increasing its stake, Hong Kong's South China Morning Post reported May 5.

Talbot, Tinkler

``Citic in our view holds the key to whether any potential corporate action turns hostile,'' UBS said. ``They may not wish to see the company's ownership change hands, depending on whose hands it may go into.'' Citic spokeswoman Susanna Chau wasn't immediately available to comment.

Private investor Nathan Tinkler was the likely seller of a 10.4 percent stake, UBS said. Talbot, currently being investigated by Queensland's Crime and Misconduct Commission, holds a 24.04 percent stake and may sell at A$20 a share, Tom Elliot, who helps manage $138 million at hedge fund MM&E Capital Ltd., said today.

``It's clear that Tinkler kicked the thing into play by selling his stake,'' Elliot said. ``Arcelor has actually done the right thing by buying a stake so if there is a bidding war at worse they make some money out of it.''

Macarthur Chairman Keith De Lacy and Xstrata spokesman James Rickards didn't return calls seeking comment.

Coal Mines

Macarthur produces 35 percent of the global supply of pulverized coal from two mines, Coppabella and Moorvale, in Australia's Queensland state. ArcelorMittal wants Macarthur for its pulverized coal output and to increase its advantage in annual contract price talks with suppliers, CLSA's Driscoll said.

Prices of coking coal will stay at records next year because of rising demand for steel and as higher costs delayed the construction of new mines, Macquarie Group Ltd. said in a May 5 report. The price of pulverized coal will be $245 a ton, up 63 percent from its previous estimate of $150 a ton, the bank said. Macarthur received between $67 and $68 a ton for pulverized coal in 2007, the company said in February.

Macarthur will be able to more than double output in the next four years as its allotted capacity at Dalrymple Bay port is increased from 4 million tons a year to 8.8 million tons, Macquarie's Spartalis said in an April 22 report.

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