June 16, 2011 / 1:24 PM / 8 years ago

Itochu-Drummond deal opens Asia to Colombian coal

TOKYO/LONDON (Reuters) - Japan’s Itochu Corp (8001.T) has teamed up with U.S. Drummond Coal in a $1.5 billion (931.2 million pounds) deal under which it will market Colombian coal in Asia.

Drummond had been in a protracted search for a partner in its Colombian mines and transport infrastructure, including a new port required by the government there.

Itochu will take a 20 percent stake in a new company, Drummond International, with the privately owned U.S. firm holding the rest, the companies said.

The stake sale does not rule out a sale of Drummond’s 80 pct holding in future, coal industry sources said.

Japan is keen for new energy sources after the Fukushima nuclear crisis but traders said poorer quality Colombian coal might not be top of its shopping list, and was more likely to be sold to China, India and elsewhere in Asia. Itochu has sold small quantities to Japan in the past.

“Itochu’s investment in Drummond International will help finance Drummond’s portion of its ongoing capital program in Colombia which is focussed on increasing coal exports in an environmentally sensitive manner,” Drummond said.

“Specifically, this transaction is tied to a capital program in Colombia over the next five years projected to be over US$1.3 billion.”

Itochu sealed the deal as Drummond wanted a minority partner and to strengthen shipments to Asia, Yoichi Kobayashi, an Itochu director, told a news conference on Thursday.

Drummond International plans to raise coal production by 10 million tonnes to 35 million tonnes by 2014.

Itochu said 70 percent of that 10 million extra coal output will be sold to Asia, especially to China, India and Japan.

Drummond said that under the deal Itochu would “obtain certain rights to market the coal produced by the Colombian mines to Japan,” but did not mention marketing elsewhere in Asia.

Japan has never been a key market for Colombian coal because the distances involved have made it too expensive. Last year, it imported only 60,355 tonnes of thermal coal from Colombia, accounting for 0.06 percent of total imports of 101.65 million tonnes, finance ministry data shows.

Japan’s utilities prefer high-grade, premium thermal coal and although Drummond’s Colombian Pribenow coal is high-grade, the quality from its new El Descanso mine has been lower.

In 2010, Japan took only one cargo of Colombian coal out of total imports of 101.65 million tonnes. Drummond is the second biggest exporter of Colombian coal.

China has occasionally taken medium to low-grade coal from Colombia and India has taken trial cargoes but to date, other origins have dominated Asian coal supply.

Europe will remain the key market for Colombian coal, utilities and producers said.

Drummond’s Pribenow coal used to attract a premium because of its high-energy, low-sulphur content but the blend with El Descanso has been less well-received by European utilities.

LONG SEARCH

Itochu’s stake in Colombia adds to a 15 percent stake it bought in the Maules Creek coal project in Australia for A$345 million last December and has been in talks to buy a further 10 percent stake.

Japan’s fourth biggest trading house was unlikely to chase any other thermal coal assets in the near term, a person involved in the Drummond deal said.

“Between Maules Creek and this investment, they’re pretty pleased with what they’ve achieved in the last 12 months,” he said. The source did not want to be named because he was not authorised to speak publicly about the deal.

Drummond has courted buyers for over a decade but stepped up its efforts in 2010 by holding an auction.

The need to invest over $1 billion had dissuaded some bidders during the auction, sources in the Colombian coal industry and among bidders had said.

Several major mining companies including Xstrata XTA.L and Glencore (GLEN.L) had bid during, but at prices nowhere near Drummond’s valuation, sources said during the bidding process.

After talks on an outright sale stalled, Drummond started late last year to look for a minority partner and several Asian entities were in the running, including Itochu.

Nomura (8604.T) advised Itochu on the transaction, Bank of America-Merrill Lynch (BAC.N) advised Drummond.

Additional reporting by Osamu Tsukimori in TOKYO and Sonali Paul in MELBOURNE; editing by William Hardy

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