That got Desjardins Securities analysts John Hughes thinking: What would a takeout of Fording Canadian Coal Trust be worth?
By factoring in a number of financial and physical metrics based on the Cleveland-Alpha deal, he calculated a "theoretical" takeout value for Fording of C$98.96 a unit, a premium of about 20% on the current price.
In a note to clients, Mr. Hughes wrote:
We understand that this exercise is largely a game in numbers; however, the values are based on a 'real' deal currently in the marketplace.
He also pointed out that Fording produces only metallurgical coal, while Alpha Natural produces a combination of metallurgical coal and lower-priced thermal coal.
Mr. Hughes maintained his "buy" rating and price target of C$85 a unit on Fording. He calculated that the company should pay out C$12.50 a unit in distributions this year based on its coal contract price of $275 a tonne. He also points out that even higher prices are possible in the next coal contract year beginning in April of 2009.
We note several other 'players' in the seaborne metallurgical coal market continue to negotiate for the current contract year, including recent market rumours indicating a target level of $370/tonne for contracts with Japanese steel producers. Any announcement regarding a settlement of contract prices at or near this level would be an extremely positive indication of potential contract prices for Fording for the upcoming contract year.