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Interview: Neil Passmore, CEO, Hannam & Partners

Do investors need to be bullish about the long term future for coal? Neil Passmore shares his views and discusses the commodity investment landscape for the coming year.

2014 was known as the year of M&A deals but many didn’t happen. How is the commodity investment landscape set for 2015-2016 and do you expect many deals to happen before the end of the year?

All eyes are currently on X2 and Rio coal.  If this deal announces, and in its wake others such as the take-over of Bogdanka occur, then with further distress apparent in many commodities and listed sub-sectors this could create the market momentum needed to unlock further deals and increase investor appetite for the sector again.  Absent such a catalyst and the kick-starting of such momentum and it is hard to see what would drive activity.

How does coal compare to other commodity assets in terms of investment opportunity at the moment?

Thermal coal prices softened ahead of most other major commodities and the industry reacted by showing supply discipline. It appears the industry adjusted and a big portion of pain lies in the past. I am not saying that all is good, China is a dominant feature and provides renewed uncertainty. But with further curtailments ahead, we are closer to the bottom than in other commodities.
Met coal is constrained in the long run, with the commodity considered strategic in many parts of the world. Not a forgotten commodity at all.

The downturn in coal prices has left many coal producers struggling with uneconomical mines. Do you think investors need to be bullish about the long term future for coal in order to identify good deals at the moment?

The industry is resilient and adjusts well. There is still a lot of potential for productivity increases, cost reductions and synergies. Where this is possible, investors will find value. In the current market it takes seasoned investment professionals to make money, banking on increasing prices will not do the trick alone. With debt not sustainable for some producers, the fall out will provide for attractive entry points for investors.

Are there any particular countries/ regions which you think might offer promising prospects for coal investors or does it depend 100% on the asset?

Europe is a major importer of thermal and met coal and will need to increase import volumes in the future. Good coal projects in Europe are rare, but the ones that exist will get a lot of attention in the coming years. Focus is shifting from projects that are geared to China Inc. Europe has excellent infrastructure and plenty of mining experience so it appears to make a lot of sense to develop coal mines in Europe again, in particular the Czech Republic and Poland where the industry is generally high costs and will need to shed employees if no new projects are being commissioned.

What happens when financial investors such as a private equity fund acquires a mining asset i.e. how do they determine how the asset should be run, by whom and what changes should be made?

This is a hard question on which to generalise.  Private equity has been associated with privatisation of former state run mines in which they have defied many of the more negative clichés often applied around them and instead been responsible for modernisation, improved safety, labour and CSR policies.  Also with rationalisation of diverse or conglomerate like businesses.  On other occasions they have been associated with more conventional “LBO” style models and bought significant debt and cost focus to businesses.

Which question or industry issue are you most interested to hear discussed at this year’s conference in Barcelona?

Displacement of export thermal coal market by power stations instead being built at mine sites to then create domestic power

You can hear more from Neil at The World Coal Leaders Network in Barcelona on 18 - 20 October where he will be participating in a panel discussion on 'Is coal still an attractive asset?'

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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