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New Hope Corporation sizes up rivals’ asset sales

It has been an interesting several years in coal mining since New Hope Corporation (ASX: NHC) attempted to take over Macarthur Coal in April 2010 and was rejected. It was Peabody Energy (NYSE: BTU) that finally won out, but with the downturn in coal mining and commodity prices, New Hope Corporation is back to take a look at other mining assets that are up for sale as miners reassess their plans in this industry and scale back development.

Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) have put coal mines up for sale recently, trimming those that have higher production costs or no longer fit new business profiles. In February, BHP announced the sale of its Gregory Crinum mine in Queensland (price estimates were about $800 million) after production was stopped in October 2012. There were no takers, and in July the miner cancelled the sale.

Rio Tinto has put its two Queenland mines, Blair Athol and Clermont, up for sale, hoping to raise $3 billion, but Blair Athol has been shut down since November 2012, and Clermont is reportedly losing $57 million a month, so they may not be attracting the highest prices currently.

Peabody Energy put its Wilkie Creek coal mine up for sale for $488 million in September 2012, and is reported to be in discussions with potential buyers.

Just like a home owner who hasn’t realised it has become a buyers’ market, they are resisting price reductions, and that is just what New Hope Corporation’s CEO Rob Neale says they will have to do if they want to sell. “The international thermal coal market is oversupplied … the industry as a whole is suffering to varying extents,” Mr Neale said. “We have been in the business for a long time and we have withstood many of these cycles and I would expect to continue to do so.”

Although his company just released its annual results showing that its profits were almost 50% down from last year at $74 million, it does have about $1.25 billion that can be used towards acquisitions, but it won’t be paying any silly prices. As Mr Neale said, “We always look at opportunities as they arise, however there still needs to be a reality attack on some of the valuations.”

Foolish takeaway

Many investors know that mining is a cyclical industry, and you have to time your purchases and sales accordingly. No one knows this better than the miners themselves. Even when a mine is shut down, it still costs a lot of money to maintain it until a sale can be done. The companies that are cashed up at the bottom of the cycle can pick up assets at bargain prices. This is why you must always look at the financial strength of a company- and not just its earnings performance. With high debt or high costs in a dull market, companies have to realise sales and, in many cases, crystallise losses.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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