Macarthur Coal Rejects Offer from Peabody (BTU, MT, PKX, YZC)

Australian coal miner Macarthur Coal has rejected a buyout offer worth about $3.3 billion from Peabody Energy Inc. (NYSE: BTU). In doing so, Macarthur officials said that the company did not believe the offer would satisfy its major shareholders and that it saw “no point taking [the offer] to shareholders if there is virtually no possibility of having it approved.”

For its part, Peabody said that it thought the offer was generous based on the boost it gave to Macarthur shares, which trade on the Australian exchange. Peabody also noted, with some bitterness, “It is unfortunate that one shareholder could block a proposal that would have created significant value for all Macarthur shareholders.”

That one shareholder is Citic Group, a state-owned Chinese investment company. Citic is Macarthur’s largest shareholder and owns 22.4% of the coal miner. India’s ArcelorMittal (NYSE: MT) and South Korea’s Posco (NYSE: PKX) combined own another 25% of the company.

Peabody bid as much as AUS$16/share for Macarthur, but had recently reduced its offer to AUS$15/share as a result of the proposed 40% super profits tax proposed by the Australian government on mineral extraction firms. The US coal miner’s highest offer valued Macarthur at about $3.8 billion.

Macarthur says that it will now get on with running its business and it is “hugely optimistic” about the company’s future.

Maybe. One possible outcome from the rejection of the Peabody bid is that another bid for Macarthur may be forthcoming. The company is the world’s largest supplier of a variety of pulverized coal called PCI coal that is in very high demand from steel makers. And some of the largest steel makers in the world are located in China.

China’s Yanzhou Coal Mining Co. Ltd. (NYSE: YZC) purchased an Australian coal mining company last year for $3.2 billion and it is not impossible that Citic Group is clearing the way for another huge mining investment. Yanzhou reported that it had $1.4 billion in cash at the end of 2009, but only $25 million in long-term debt. Yanzhou said in April that it was seeking investments in the US, Canada, and Australia.

Yanzhou, together with Citic, could put easily put together a cash offer that would give them control of Macarthur. Or Citic could buy out Macarthur’s other large stakeholders for a 47.4% share of the company, and then bring in Yanzhou.

China’s demand for coal will only increase, as will its demand for steel. Locking up a resource like Macarthur’s PCI coal would be a very smart move.

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