After Grande Cache Coal Corp. received a friendly takeover bid on Monday, investors immediately zeroed in on Cline Mining Corp. as the next M&A candidate. Cline is the only coking coal producer left on the Toronto Stock Exchange that appears to be a logical target, and the stock jumped 19% after the Grande Cache announcement.
But is a near-term takeout really in the cards? RBC Capital Markets analyst Robin Kozar doesn’t think so. He wrote that the upside share price potential for a takeover appears modest in 2012 as Cline tries to expand production at its New Elk mine in Colorado.
“With ramp-up risks remaining, uncertainty over realized prices and sales, and challenging logistics to reach the strategic Asian market, we view a potential takeout of [Cline] over the next six months as unlikely,” he wrote in a note.
However, he does see a takeover as a possibility over the medium to long term as Cline works to achieve a production rate of three million short tons per year at New Elk.
Using the implied multiples in the Grande Cache deal and historic transaction multiples in the sector (based on estimated value per tonne of resource), Mr. Kozar calculated that the potential takeout value of Cline is in the range of $3.50 to $4.11 a share. That is a huge premium over Monday’s closing price of $2.11, but he noted that the analysis excludes the quality of coal being produced and the cost to bring