Peabody Energy makes another run at MacArthur Coal and its supply of coal for making steel

The big boys are back. A little more than a year after MacArthur Coal (MCC.AU in Sydney and MACDY in New York) rejected a A$15.00 a share bid from Peabody Energy (BTU) and three years after the company ended acquisition talks with ArcelorMittal (MT), the biggest U.S. coal company and the world’s largest steel maker have teamed up on a A$15.50 bid for the Australian coal producer.

Thanks to a stronger Australian dollar this year’s bid is worth about US$16.59 a share versus a May 2010 value of U.S.$13.47. That’s a 23% higher price than the last time around.

The price was about 40% above the close on the Sydney market today before the bid was announced. The shares were up a little more than 27% in New York trading. Today the Sydney shares are playing catch up and have climbed 37%.

ArcelorMittal owns about 15% of MacArthur. China’s Citic Group and South Korea’s Posco own 23% of the Australian miner between them.

MacArthur is the largest exporter of metallurgical coal used by steelmakers. The company has total coal reserves of 270 million tons and total coal resources estimated at 2.3 billion tons.

Peabody and ArcelorMittal are making the bid through a joint venture 60% owned by Peabody and 40% owned by ArcelorMittal.

It’s hard for me to see another bid emerging given the history among these companies and the stakes owned by ArcelorMittal and Citic Group and Posco. Read more

I’d wait just a little longer on watch-listed Peabody Energy (BTU)

Mongolia has chosen China Shenhua Energy (1088.HK or CSUAY in New York), a Russian-led consortium, and Peabody Energy (BTU) to develop the western portion of its Tavan Tolgoi deposit of coking coal. Tavan Tolgoi contains an estimated 6.5 billion metric tons of metallurgical coal and the western block accounts for an estimated 1.2 billion tons of that. Development rights were divided with 40% going to China Shenhua, 36% to the Russian consortium, and 24% to Peabody Energy. The projected cost of developing the western block is $7.3 billion.

Winning the right to develop 24% of 1.2 billion metric tons of coal is a big deal. Getting the rights to 24% of 1.2 billion tons of metallurgical coal next door to China is an even bigger deal for Peabody. The company’s coal current coal production is slanted to thermal coal, the kind burned in power plants, and to U.S. thermal markets at that with 84% of 2010 sales going to U.S. electricity generators. This win gives Peabody more exposure to the metallurgical coal market and to China, the world’s biggest market for coal of any sort.

Peabody has been busy at work adding capacity in Australia to put some of its supply closer to big end markets in China and India. But as of 2010 only 12% of the company’s total production of 211 million metric tons came from that country. Access to the Tavan Tolgoi deposits will increase the company’s non-U.S. production. (Peabody Energy already operates a coal and mineral joint venture in Mongolia.)

Increases in demand for coking coal, used in steel making, are expected to outrun increases in supply in 2010-2015. Peabody estimates that seaborne demand will grow by 85 million to 95 million metric tons in that period but that seaborne supply will increase by just 65 million to 75 million metric tons. That gap should fuel rising prices for metallurgical coal.

Tavan Tolgoi isn’t going to add to Peabody’s revenue or earnings this year or next, but even without that production Standard & Poor’s is projecting s 24% increase in revenue for 2011 on a 6% increase in production and a 17% increase in price. Read more

I’d buy Peabody Energy (BTU) on the post-earnings drop—except that I think you’ll be able to get this cheaper in coming days as commodity stocks pull back (once again) over fears that growth in China will slow as that country ratchets up its fight against inflation.

On April 19, the company announced first quarter 2011 earnings of 67 cents a share, 7 cents a share better than Wall Street projections, on revenue of $1.75 billion. Revenue climbed 15% from the first quarter of 2010 and slightly exceeded analyst projections of $1.74 billion.

All this was pretty good for a company that saw its big Australian coalmines underwater for part of the period. But production declines were more than offset by price increases. Revenue per ton in Australia jumped by 43% with price increases for metallurgical coal—up 74%–outstripping increases for thermal coal.

The stock was down yesterday on that company specific news and on a drop in the sector on those China fears.

For the second quarter, Peabody guided earnings per share to a range of 85 cents to $1.10. That’s well below the Wall Street consensus of $1.37 a share. For all of 2011 Peabody told analysts to expect earnings of $3.50 to $4.50 a share versus the current $5.08 Wall Street consensus. Coal production volumes will be down from projections because of carry-over from the Australian floods, a scheduled move of a mine long wall in Australia, and difficult geology just encountered at the company’s Twentymile Mine in Colorado.

But part of the April 19 struggle in Peabody shares was a reflection of sector-wide worries about demand. Read more

Acquisition fever burns hot–here are three stocks to profit from the frenzy

Acquisition frenzy is upon us. August is on a path to be the second best August ever for acquisitions. Making a profit from one of these deals ought to be as easy as shooting fish in a barrel.

Except it’s not.

Many of the barrels as completely void of deals: fire away as you like you’re not going to hit anything. Others are full of nothing but minnows: Nothing you hit is going to be worth the ammo.

There is a way to improve the odds, though.

If you understand the reasons behind the surge in acquisitions, you can figure out where the big fish might be hiding. (For more on the acquisitions boom see my post http://jubakpicks.com/2010/08/24/thinking-long-term-right-now-is-hard-which-is-why-its-worth-doing/ )

That can help you eliminate some barrels and prioritize others.

Using that process, I’ve come up with three acquisition candidates that I think are worth putting in your gun sights. Read more