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Diamond in the Rough? Coal IPOs Rise -- WSJ

4 Feb 2017 7:32 am
By Timothy Puko, Matt Jarzemsky and Maureen Farrell 

Appalachian miner Ramaco Resources Inc. priced an initial public offering on Thursday, kicking off what could be the biggest wave of coal IPOs in at least two decades.

Only a year ago some of the industry's biggest producers were in bankruptcy, laid low by plunging coal prices and heavy debt. Some of these same firms are emerging from chapter 11, eager to sell shares to the public or refinance debt after a powerful rally in coal prices.

International prices for the type of coal used to make steel, metallurgical coal, tripled in 2016 from a decade-low. Rule changes in China that limited work in mines, mine retirements in Australia and U.S. production cutbacks sparked the rally. Many troubled mines were suddenly profitable.

Now at least a half dozen U.S. coal firms are preparing or exploring public offerings, say people familiar with the matter. No year has ever had more than four coal company IPOs, according to records from data provider Dealogic that go back to 1995.

Warrior Met Coal LLC, created with mines from bankrupt Walter Energy Inc., has tapped Credit Suisse Group AG and other banks to lead an IPO expected to value the company at about $3 billion, according to people familiar with the matter.

Blackhawk Mining LLC, one of the largest producers of metallurgical coal in the U.S., is also considering an IPO, according to a person familiar with the matter. The company is marketing $660 million in debt and could follow that with a stock offering in the early summer, the person said.

Contura Energy Inc. and Coronado Coal LLC have also interviewed bankers for potential share listings, say people familiar with the matter.

Ramaco, the Lexington, Ky., company, sold the first U.S. coal IPO in more than a year, even though it mined its first coal a little more than a month ago. The offering raised $81 million after the company and other shareholders sold six million shares at $13.50 a share, according to people familiar with the process.

Record high coal prices in 2011 led the country's biggest miners to borrow billions of dollars to buy more mines and boost output. That created a supply glut, and prices for metallurgical coal fell more than 70% when economic growth slowed in China and Europe. Three of the five largest U.S. coal miners, accounting for more than a third of all U.S. production, went bankrupt.

Demand expectations are now showing promise for the first time in years, analysts said. Shares in coal producers also briefly surged this fall after the election of President Donald Trump, who has said he wants to revive the sector.

The U.S. Senate gave the industry another potential lift on Thursday by following the House in voting to repeal a rule that limited companies from dumping mining waste in streams. The coal industry views the environmental rule as burdensome regulation.

"It's a very optimistic time now for the coal market because those regulations are being pushed back," said George Schultze, managing member of Schultze Asset Management LLC, with $175 million in assets. "Those companies that restructured when the outlook was the worst are really in position to benefit."

How well these IPOs do may also depend on investor's stomach for wild price swings. Coal prices have tumbled by nearly half since November, after China relaxed restrictions on the number of days mines can be open and mines world-wide have already ramped up output to take advantage of the rally in prices.

Some miners are still very early in the exploration process and could scrap plans if coal prices fall further. Companies could also spin off metallurgical coal assets or consolidate them.

"There's an expectation that the trend of rising spot prices for met coal will continue for awhile. Investors don't think it's short lived," said Michael Cippoletti, head of U.S. equity capital markets, Bank of Montreal, one of the banks working with Ramaco.

Many are turning to the debt market, too. Peabody Energy Corp., the largest U.S. miner, this week launched a $1 billion high-yield bond offering to help pay off bank loans before it exits bankruptcy, according to a company filing.

A few big private-equity firms stand to gain if the coal IPOs go well. Apollo Global Management LLC is the largest owner of Warrior, which may be the next to go public.

Apollo was negotiating last year to buy Australian mines to diversify Warrior's holdings ahead of a possible IPO, but Anglo American PLC pulled back on the deal as coal's value skyrocketed, according to a person familiar with the matter.

Coronado Coal is backed by the energy and resource-oriented private-equity firm Energy & Minerals Group. John Raymond, the firm's majority owner and son of former Exxon Mobil Corp. chief Lee Raymond, was also a backer of the late wildcatter Aubrey McClendon.

Coronado bought metallurgical-coal mines between 2014 and 2016 from Cliffs Natural Resources Inc. and Consol Energy Inc. when the coal's price was 40% to 50% cheaper than it is today.

Paringa Resources Ltd., with shares trading in Australia, is exploring a U.S. IPO for a startup Kentucky coal business, according to a person familiar with the matter. The company has met with bankers, the person said. Unlike most other offerings, Paringa's would focuses on thermal coal, the kind burned by power plants.

Shares of Ramaco Resources pared gains throughout the day and ended up underperforming the market and peers. The coal miner based in Lexington, Ky., settled at $13.55 a share, up 0.4% on its first day of listing on NASDAQ, a day it opened at nearly $14.80 a share. Coal executives, bankers, analysts and investors consider the IPO a bellwether of investor interest in coal and an influence on share offerings under consideration at rival miners. But its gains fell short of today's S&P 500 (up 0.7%) and nearly all other major traded coal miners. Consol Energy settled up 2.5%, Contura Energy up 2.3%, Arch Coal up 1.5% and Foresight Energy up 0.6%.

Write to Timothy Puko at tim.puko@wsj.com, Matt Jarzemsky at matthew.jarzemsky@wsj.com and Maureen Farrell at maureen.farrell@wsj.com
 

(END) Dow Jones Newswires

February 04, 2017 02:32 ET (07:32 GMT)

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