The Combination Of Cambrian Mining With Western Canadian Coal Does Make Sense, But You Don't Have To Like It
By Alastair Ford
minesite.com
In one short sentence Cambrian Mining chief executive Mark Burridge sums up the rational and structural argument for allowing his company to be taken over by British Columbia-focused Western Canadian Coal. “The holding company discount will be removed”, he says. What he means by this nice piece of market-speak is that Cambrian will stop being a company that owns stakes in other companies and will become one that directly owns its principal assets. Operating mining companies are traditionally given a better rating than ones that just own bits of other companies, where sum-of-the-parts valuations are always considered notional at best. A discount to net asset value of 10 to 20 per cent is standard for an investment company like Cambrian, so for any investors looking to maximize shareholder value, consolidating an investment company into an operating company seems a sensible enough move, especially in times such as these, when valuations are under severe pressure. And even more especially when there's a US$36 million debt relief package on the table at the same time.
Of course the world didn’t always look this way. The directly held assets that Cambrian itself brings to the party are a suite of coal properties in Virginia that it acquired after it bought out Coal International last year. But remember, it was Cambrian that listed Coal International on the market in the first place. That listing put a lot of money Cambrian’s way, but the investors who came in at the Coal International listing were themselves only rarely in the money. They certainly weren’t by the time Cambrian bought it back. As to Western, in which Cambrian is already the biggest shareholder, well, Cambrian was also heavily involved in the listing of Western Canadian back in 2005. Cambrian’s chairman John Byrne is also chairman of Western Canadian, and has been since 2001. And back when all these deals, and others, were being done, precious little noise was being made about the undesirability of any “holding company discount”. Why? Because of all the lovely hard cash that the spin-off deals were bringing in to the holding company, not to mention the fees and bonuses that went in their wake. Also because in a rising market the discount is always less painful.
But if Coal International underperformed, then for a long time the Western Canadian listing was nothing short of disastrous. The company struggled and struggled. The Canadians sold it down relentlessly on their markets, and because there was no liquidity in London there was no support from London either, in spite of the valiant efforts of local analysts to talk up the story, including, amongst others, the late, lamented Sacha Borthwick. On more than one occasion, in the face of a failed deal or a missed production deadline, Cambrian had to bail out Western – a case of biting the bullet in the face of a much worse option. But now, following a bumper 2008 for Western Canadian, the boot has shifted dramatically onto the other foot.
Asked exactly who it was who first put forward the idea of the proposed takeover of Cambrian by Western Canadian, Mark Burridge equivocates. It was an idea that emerged out of several meetings, he implies, and who are we to argue, though we would remind readers that these two companies share a chairman, and one who’s often very forthright in his views. Western, it will be fairly admitted by everyone, owes Cambrian a few favours, and since this time round it’s Cambrian that needs the bail-out it, seems only right and proper that the Canadians step up to the plate. At least, that’d be the cynics’ view.
From where he sits in London, though, Mark Burridge is nothing like so negative on the prevailing state of affairs. The way he tells it, Cambrian couldn’t look at renegotiating its loan to Investec while it was in talks about a possible takeover by Western Canadian, as that would have added a serious wild-card into the whole proceedings. Much better to let Western take the debt onto its own books ahead of the deal, and sort it all out later in the form of inter-company loans. If the terms of the loan as they stand at the moment are pretty steep, Mark Burridge can afford a wry smile: “it’s consistent with what we charged them”, he says, so fair’s fair.
So what’s in it for Western Canadian, a company which doesn’t stand to have any sort of holding company discount removed? Well, Western’s not been immune to the current economic crisis. Overall, last year was a good one, and brought cash aplenty into the company. But recent months have brought less happy developments. There have been production cutbacks on its BC assets and a bit of the diversity that Cambrian brings – US coal, plus the possibility of an expansion into the Australian gold mining scene – does offset some of the prevailing negative sentiment. The selling price for Cambrian's US coal is locked in, so the company will take less of a hit from lower coal prices than others. There’s also the consideration that with Cambrian in hock to Investec, its stake in Western could have become something of an overhang in the market. Not helpful with shares everywhere under pressure anyway.
For both parties the benefits of cutting down overheads and costs at the top end of the respective corporate structures are obvious. “The general principal”, says Mark Burridge, “is that we want to create some synergies out of very complementary teams”. Cost-cutting is very fashionable these days. But in a way it's even more simple than that – now’s the time for battening down the hatches, the time to secure all your assets under one roof. And it looks like John Byrne’s gathering up his clutch of problem children, and sheltering them all in the same place until the storm passes. You can't blame him for that: there are plenty of worse strategies out there. |
