Mick Davis first investment a $3bn contrarian gamble

Mick Davis first investment a $3bn contrarian gambleMick Davis' X2 Resources is said to have emerged as the last remaining bidder for Rio Tinto’s (LON:RIO) coal assets in Australia’s Hunter Valley in a deal that could be worth around $2.2 billion (A$3 billion).

The negotiations between the parties are progressing after other bidders including an Australian consortium called New Hope and Switzerland's Glencore lost interest, Bloomberg reported Monday citing people familiar with the matter.

New Hope last month bought Rio's 40% stake in the Bengalla coal operations in the country, while Glencore, which operates coal mines neighbouring Rio's Hunter Valley mines, is itself in divestment mode.

Rio Tinto's operations — Bengalla, Hunter Valley Operations and Mount Thorley Warkworth —  produced 28 million metric tons of thermal coal used for electricity generation in 2013, the last year for which data is available. They also produced almost 6 million tons of semi-soft coking coal, used in the production of steel.

Davis, which accumulated $5.6 billion in X2 more than 18 months ago, has so far failed to pull the trigger despite the likes of Anglo-American, BHP Billiton, Glencore and Vale putting assets up for sale.

With X2 Davis, who is a cricket fanatic, appears to be taking a five-day test approach (which often ends without a result), rather than going for a quick Twenty20 win.

The caution seems somewhat uncharacteristic. Davis built Xstrata over less than a decade through a series of billion dollar transactions – the bulk in the coal industry – into a company with 70,000 employees in 20 countries. Xstrata's market value peaked in 2008 at $85 billion.

But even before then Davis was a formidable dealmaker who with fellow South African Brian Gilbertson created Billiton. Davis left for Xstrata after Billiton was sold to BHP in 2001 (Gilberston moved into emeralds of all things). That whole saga has of course now come full circle with the South32 spinoff.

Davis's wager on thermal coal also comes at a difficult time for coal mining in Australia and the 890 million tonne seaborne market which is undergoing fundamental shifts in demand.

Benchmark Australian Newcastle export coal is in long term decline trading at an 8-year low. From an all-time high in early 2011 the commodity fell to $70 a tonne a year ago to $54 today.

Imports by top consumer China has tanked by nearly a third this year as Beijing clamps down on pollution and clears the ground for the world's largest carbon cap and trade scheme. China’s coal production and consumption peaked last year after being responsible for 80% of global coal consumption growth since 2000.

Hopes are high that India, set to overtake China as the world’s most populous nation during the next decade, could take over the role of China as the world's growth engine. As far as thermal coal is concerned India has already overtaken China as the world’s top importer and domestic production is ramping up just as China’s starts to decline.

Davis’s X2 Resources goes after Rio’s coal assets in Australia

Rio Tinto’s Mount Thorley Warkworth mine, in New South Wales Hunter Valley region. (Image from archives)

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