Peabody's Cheap Bid For Macarthur

But Peabody's non-binding first offer of $13 a share for Macarthur is way too cheap and will involve a massive transfer of wealth from Macarthur shareholders to the US group.

A deal either has to be done or not done because Noble Group's proposed deal involving the sale of Gloucester Coal (plus other assets in Queensland) to Macarthur in exchange for a 24.6% stake for Noble will be voted on by Macarthur shareholders at a special meeting next Monday, April 12.

But the value of the Macarthur shares in the deal is way below Peabody's proposed offer price: in fact it's 34% under the $A13 a share.

So Noble and Macarthur will either have to come up with a new higher-priced deal, or the Noble proposal bites the dust.

With big price rises coming from new contracts, Macarthur stands to see a significant boost in revenue and profits in the coming year, at a time when Queensland's poor coal infrastructure is starting to improve, making shipments more reliable and export growth easier to come by.

That will allow Macarthur to boost exports in the next year or so, and also Peabody, which also operates in Queensland.

But Peabody stands to make a lot more money than seems from the $13 a share offer.

It is paying around $A2.27 a tonne for Macarthur's 1.450 billion of mineable reserves and resources (145 million tonnes of reserves, 1.3 billion tonnes of resources).

It's recently issued 2009 accounts shows it made gross profits of $US19.40 a tonne last year in Australia, down from the record $US43.43 a tonne in the bubble-like 2008 year.

Peabody has more hard coking coal in its Australian production and exports than Macarthur, but based on the price rises in the pipeline, the price undervalues Macarthur considerably.

Spot and settlement prices for the 2010 shipping year are now 50% to 70% above the 2009-10 contract prices for coking and thermal coal exports from Australia, Peabody is looking at a sharp improvement in earnings from its Australian mines.

Peabody will accommodate the big coal and steel groups on Macarthur's share register (Citic, Posco, Arecelor Mittal). They own around 46% of the company between them.

Peabody is offering to let them remain in a privatised Macarthur.

Buying Macarthur cheaply will merely drive those profits higher because it is the largest seaborne miner and exporter of pulverised coal (which is low quality soft coking coal ground to a fine dust and shipped to steelmakers around the world).

Peabody though stands to make more. It already has plans to double production and exports from Australia (it operates in NSW as well) by 2014 from its own mines. In its 2009 annual profit report, Peabody said:

"Our near-term focus remains serving the high-growth Pacific markets as we expand our Australian volumes and global trading activities."

"In Australia, Peabody is advancing projects that would approximately double 2009's export volumes by 2014.

"Targeted 2014 capacity includes 12 to 15 million tons per year of seaborne metallurgical coal and 15 to 17 million tons per year of export thermal coal.

"Peabody believes it has the necessary logistics capacity to deliver the higher volumes, based on previous acquisitions and port investments."

Buying Macarthur cheaply, especially with its planned expansions in Queensland, will allow Peabody to drive that doubling faster and further.

Macarthur shares jumped another 5.8% on Thursday to end at $14.87.

The market says the Noble Group bid is dead and is expecting a counter bid and/or Peabody to offer a lot more.