May 29th, 2012 | Caixin China Digs into America
With the United States tapping shale gas, Chinese companies setting their sights on its coal mines
The development of shale gas has lessened America’s dependence on imported oil, but it has also sent American coal companies into a harsh winter. After a significant decrease in coal consumption, suppliers and manufacturers have begun to shift their target market overseas.
Ernie Thrasher, CEO of Xcoal Energy & Resources, America’s largest supplier of metallurgical coal, said that “on the one hand, natural gas is cheap. On the other hand, environmental factors are putting a lot of pressure on us. To develop the coal consumer market, we have to look to foreign markets, especially China.”
“We’re inviting Chinese coal companies and power companies to the United States to look at our coal and hoping for joint development,” an executive at a major American coal firm said.
The preferred partners include China’s state-owned energy majors such as Shenhua Group and China National Coal Group. On May 7, Guizhou Guochuang Energy Holding Group said it had raised 3.9 billion yuan in a private placement to be used mainly to acquire and develop Triple H Coal Company, making it the first Chinese company to invest in coal in America.
“As far as I know, Datang, Huadian, Shenhua, China Coal, Qinfa Group and China Coal Solution are all attempting to acquire coal assets in the United States,” the executive said. “I’ve talked with China Investment Corporation about acquiring American coal.”
Last October, a team led by the National Development and Reform Commission with staff from Shenhua and China Coal went to the United States for a research on the coal industry, and also did some preliminary work for acquisition deals.
A top Shenhua executive said that coal mines in Tennessee were attracting a lot of attention from investors. “Shenhua is also following them with interest,” a China Coal executive said, adding that his company was focused on coal resources abroad, including in the United States. “China Coal doesn’t lack funds. When we find the proper target, we’ll certainly spend money on it.”
Others in China are apprehensive about going to the United States to develop coal. While it is cheap, sales and transport are big problems.
However, demand in China means American coal is still a profitable proposition for Chinese firms. Li Chaolin, a researcher at the China Coal Transportation & Sale Society, said America’s mine-exit price of coal was around US$ 10 per ton. After transport costs, the price at a Chinese port is around US$ 80 per ton, which was still favorable compared to Chinese coal. Chinese 5,500 kilocalorie coal, for example, sells for around 780 yuan, or more than US$ 120 per ton, in Qinhuangdao, a port in northern China.
American coal producers also hope to attract Chinese investors to jointly develop coal mines in the United States. In the face of cheaper resources, Guizhou Guochuang has become a pioneer.
Guochuang said in the May 7 announcement that a wholly owned subsidiary, Jiangsu Dipu Mining Investment Co., would acquire a full stake in Treasure Port International Limited (TPI) for up to US$ 10 million, and then invest a further 3.9 billion yuan in TPI to help the company repay debt. More importantly, it would invest 350 million yuan in TPI’s Tennessee-based mining subsidiary Triple H Coal.
“Triple H Coal was sold mainly because the company had capital issues,” an intermediary representing the seller said. Triple H Coal has permanent rights to about 125 square kilometers of land in Campbell County and the coal resources below the land.
In March 2011, TPI acquired Triple H Coal, mainly funded by borrowing from Questmark Mining Rights Investment Fund.
“Although TPI borrowed to acquire THC, mine operating conditions couldn’t support the high interest rates,” the intermediary said.
As of March 31, 2012, TPI had total assets of 3.4 billion yuan, total liabilities of 3.5 billion yuan and shareholder equity of negative 168 million yuan. The company lost 124 million yuan in 2011 and 40.3 million yuan in the first quarter of 2012. TPI borrowed from Questmark at an annual rate of 5 percent to be repaid by April 5, 2013.
Guochuang said Triple H Coal has five other mining permit applications awaiting approval, and the company plans to build five new mines with 1 million tons of capacity each after the acquisition, which will have annual production capacity of 5 million tons of coking coal.
In addition, Guochuang will work with China Coal Global Energy Trading as its sales agent. The company has committed to completing sales of no less than 80 percent of Triple H Coal’s annual coal production each year.
A coal analyst at a Chinese brokerage firm said that the acquisition price was not cheap. “In general, an American coal mine with a billion tons of resources would be around US$ 50 million, not including construction of facilities.” The analyst said that the transaction is not as satisfactory as hoped in terms of rate of return either. “A part of the coal seam in the mine is already being exploited, so how much can be extracted in the future and what how much economic benefit it will bring is difficult to determine.”
However, several large, centrally administered state-owned enterprises have not taken substantive action. “Some have gone to America to discuss acquisitions, but there has been no substantive action, mainly because of transportation issues,” the American coal company executive said.
The model for cooperation between U.S. and Chinese companies is jointly funded development. Chinese companies have to arrange their own transport for the coal, and transport faces bottlenecks.
Most American coal exports to Asia are put on ships on the East or Gulf coasts. Freight costs for this sort of export to Asia are high, Thrasher said, and shipping times are long, usually around 55 days to China.
Coal mining in America is moving west, but there are no large export ports on the West Coast. The Cowlitz County government in the northwestern state of Washington has approved the building of the Chinook coal export port in Longview, mainly for exports to China and other coal-hungry Asian economies. But the plan is under fire from American environmentalists, and work has not yet begun.
In Seattle, Peabody Energy is trying to build port facilities to export 20 to 25 million tons of coal to Asia, but opposition from environmental groups caused the plan to be shelved.
“We’ve invested several hundreds of millions of dollars, but because of opposition from environmentalists and locals, we’ve suspended work,” a Peabody Energy executive said.
“We originally expected it to be completed in 2015, but now we estimate 2018.”
By staff reporter Zhang Boling