Somebody Needs to Acquire Corsa Coal

Canadian-listed Corsa Coal (CSO) is a small coking coal producer with active mines in Pennsylvania and Maryland. The company is producing at a run-rate of about 500k tons per year of premium low-vol, low-sulfur coking coal. Located just 170 miles from the port of Baltimore, MD, Corsa is ideally situated for exports. Currently the company is selling its coal domestically to companies like Alpha Natural Resources (NYSE: ANR) that then blend it and export it. However, Corsa owns a coal prep plant with annual capacity of ~2 million washed tons. Management plans to fill its prep plant with its own growing production and third-party coals and to begin exporting the blends themselves.

 

The key is that an acquirer of Corsa could purchase nearby coal reserves and upgrade the company's wash plant to, say, 3 million tons. Some of the prospective acquirers might already have wash plants in the area. Building or buying enough washing capacity to get to 4-5 million tons of low-vol coking coal production would be a home run. The total annual amount of low-vol coking coal produced in the U.S. is estimated to be 20 million tons.

 

To put the value of Corsa's future production into perspective, Walter Energy's (NYSE: WLT) low-to-mid-vol coking coal mines in Alabama are producing about 7 million tons per year. If one assumes that Walter's Alabama operations account for half of its total enterprise value (EV), then each million tons of annual production is worth about $300 million. Over time, if an acquirer were to reach 2 million clean tons out of Corsa's wash plant, that production would be worth a multiple of a reasonable acquisition price for Corsa.  

 

Corsa would make a great tuck-in acquisition for Alpha, Arch Coal, (NYSE: ACI) or Alliance Resource Partners, (NASDAQ: ARLP). Given the turmoil in the coal markets, one might wonder if these companies would consider an acquisition at this time. Not only should they consider it, they would be foolish not to do it. When the coal market rebounds, Corsa's growing production in a desirable location and 1.8 million ton wash plant will be worth a lot more than the current EV.

 

Corsa's fully diluted EV is about CAD$70 million. At run-rate sales of ~2 million clean tons per year, the company could be generating cash margin dollars of $80-$100 million per year by 2014 or 2015. Based on a cash margin multiple of 4x, the company could be worth $320 to $400 million. Taking the mid-point of $360 million, a larger producer should be willing to pay a third or up to half of that, let's call it $150 million. 

 

The above listed players could swing the $150 million through their existing cash and debt facilities; they certainly would not want to issue equity at depressed prices. Even $150 million might be a bit of a stretch for Arch. Arch has $4 billion of net debt on its balance sheet. Personally, I think adding another $150 million or so would be well worth it, but others might disagree. Arch would greatly benefit from increased exposure to coking coal exports, not just any coking coal, but the top notch low-vol stuff, of which it has very little.  

 

Alpha is already the largest U.S. producer and exporter of coking coal at an estimated 22 million tons this year. Adding Corsa's high quality coal into the mix would do wonders for Alpha's blending flexibility. In Alpha's hands, 2 million low-vol tons could be blended into 3 million mid-vol tons and still command very attractive prices. Alpha is known for its blending prowess, so this acquisition would clearly make a lot of sense. Importantly, Alpha is sitting on a lot of cash and marketable securities, last reported at $700 million.

 

Alliance Resource Partners produces very little if any coking coal because most of its production comes from the Illinois basin. Alliance is a MLP that's currently yielding 7%. The company is killing it, they've increased their unit distribution by a CAGR of more than 12% over the past 10 years! In order to maintain such impressive growth, Alliance needs to continue making acquisitions like this one. I chose ARLP, ANR and ACI because an acquisition of Corsa would really move the earnings needle for them in coming years.

 

In the end, I'm confident that Corsa will get scooped up by someone--the question is, by whom? If players like the ones listed herein wait too long, the stock market capitalization of Corsa Coal could double or triple. A question that Alpha, Arch and Alliance should be asking is "how will we feel if we let a competitor take this out from under us?" The companies that pass up on Corsa might feel pretty foolish in a few years.