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Washington H. Soul Pattinson and Co. Ltd bets big on coal

“Be fearful when others are greedy and greedy when others are fearful” — Warren Buffett.

Coal – there isn’t a market in the world currently gripped by more fear. The anti-coal lobby is in full swing, green energy production is increasing, and even some of our banks are tightening their lending policies for new coal projects.

Australian coal mining company New Hope Corporation Limited (ASX: NHC) appears to be following Buffett’s advice and buying up big in the depressed coal market.

Last week, New Hope announced a binding agreement to purchase a 40% interest in the Bengalla thermal coal mine located in New South Wales for A$865 million from a subsidiary of Rio Tinto Limited (ASX: RIO).

What does this have to do with Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) (WHSP)?

WHSP currently owns 59.7% of New Hope Coal which means that its effective investment is $515 million – 60% of the total $856 million.

New Hope’s financial statements show a cash balance around $1.05 billion as at 31 July 2015 which means there should be no requirement for a capital raising to complete the purchase – good news for both companies.

New Hope benefits from the wisdom and experience of long-serving WHSP Chairman Robert D. Millner also serving as Chairman of the group, which could partly explain its financially conservative business with no debt and a large cash balance.

A possible issue for WHSP shareholders is that after the purchase, New Hope’s reduced cash balance may limit its future dividend payments to its parent, WHSP. However, New Hope has an impressive record of financial responsibility (which isn’t the norm in the mining industry) and I think this is a minor risk.

Mining companies have a relatively poor track record of making successful acquisitions, but the experience of WHSP’s management team being involved in this transaction could make the difference.

Only time will tell if the purchase will pay off for New Hope and WHSP shareholders.

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Motley Fool contributor Mitch Sonogan has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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