Move Over, Shania Twain: Meet Canada's Surprising New Superstar

William Shatner still has swagger, and Neil Young still rocks like he is young. The legend of Gretzky is timeless, and Shania's catchy ditties still echo across the airwaves. But Canada has a new superstar, even if the world has failed to take notice.

With a hat-tip to Canadian game-show host Alex Trebek, let's start with the answer and end with the question. This hot commodity, which major producers agree is in the early stages of a long-term global supercycle, has drawn more consolidation activity in recent years than any other resource in Canada's rich mineral inventory. If you answered "What is metallurgical coal?" then you are today's champion.

In pop culture, we identify stardom by the throngs of adoring fans. Within the financial realm, however, superstars can emerge even before the public takes notice. Using strategic transactions as a gauge of popularity among the most discerning fans of metallurgical coal (the world's major producers), the Peace River Coalfield of British Columbia may be Canada's most adored mineralized geological trend.

A focused frenzy of determined star-seekers
Swiss miner XSTRATA (OTC: XSRAF.PK), the behemoth that is poised to merge with Glencore International to create a $90 billion gargantuan, this week announced its third asset purchase in the Peace River Coalfield in less than 12 months. Acquiring the Sukunka met coal deposit from Talisman Energy (NYSE: TLM  ) for $500 million in cash, XSTRATA continues to expand the strategic footprint of an attractive, contiguous land package within this clearly coveted region. Far larger than the preceding acquisitions of First Coal (for $153 million) and Cline Mining's Lossan deposit (for $40 million), this latest move underscores a resiliently bullish long-term outlook for global met coal demand even as a near-term dip in demand has seen equity valuations crumbling and select miners reducing their output. As with XSTRATA, I believe the current environment is ideal for those looking to initiate exposure to the long-term bullish outlook for this unsung star of the commodity complex.

XSTRATA is not the only force for consolidation in the region. The coal-mining subsidiary of Anglo American shelled out $166 million last October to consolidate its interest in the nearby Trend mine and related exploration targets. Although shareholders of Walter Energy (NYSE: WLT  ) have been among the hardest-hit by the prevailing weakness in the sector, Walter's $3.24 billion acquisition of Western Coal back in 2010 featured an expansive property portfolio in the Peace River Coalfield running roughly parallel to that of XSTRATA. Fools will recall that Teck Resources (NYSE: TCK  ) suffered some serious pain of its own following its $14.1 billion acquisition of Fording Canadian Coal Trust back in 2008, but Teck has since re-emerged. Meanwhile, back in the Peace River Coalfield, Teck is weighing a potential restart of operations at the historical Quintette mine, with a feasibility study expected during the second quarter.

Although the property is across the provincial border into Alberta from B.C.'s Peace River Coalfield, last year's $1 billion acquisition of Grande Cache Coal also belongs in this discussion as further evidence of strategic global interest in Canada's quality coking coal. As I stated at the time: "Even met coal deposits of relatively modest scale have leapt onto the radar screens of determined consolidators in a very big way. This suggests to me that the recent collapse in met coal share valuations is likely to prove a short-lived anomaly within a still-anticipated global supercycle for the strategic resource." Even as near-term softness in the met-coal market persists, I stand behind that long-term perspective.

A future star is born
Looking over a map of the Peace River Coalfield, and the key known deposits on the trend, you can't help fixing your gaze upon one glaring feature. In the wake of all this concerted consolidation activity, the Carbon Creek deposit -- majority-owned by junior developer Cardero Resource (AMEX: CDY  ) -- stands out like an undiscovered star that was born for the big stage. Cardero completed its acquisition of private company Coalhunter in 2011 and signaled the company's strategic focus upon this high-quality coal asset by inserting Coalhunter's founder Michael Hunter as Cardero's CEO. Hunter also founded First Coal, the company that XSTRATA purchased last year for $153 million.

I sat down with Cardero CEO Michael Hunter in Toronto this week at the Prospectors and Developers Association of Canada's mining conference, and I look forward to sharing excerpts from that discussion next week. To catch that article and all my forthcoming coverage of Canada's met-coal bonanza, please bookmark my article list, or follow me on Twitter. In the meantime, I wish to offer my readers a brief glimpse of the relative valuation between XSTRATA's latest purchase and Cardero's 75% stake the Carbon Creek deposit.

XSTRATA's $500 million purchase price for the Talisman's Sukunka deposit equates to $2.12 for each of the asset's 236 million tons in measured and indicated resource. Cardero Resource carries a current market capitalization of just over $120 million, or merely 16% of the project's attributable, post-tax net present value (8% discount rate) of $752 million, as calculated by a preliminary economic assessment last December. Delivered as it was into an equity market that appeared disjointed from market fundamentals, I argued that Cardero's meaningfully positive assessment of Carbon Creek fell entirely upon deaf ears. Applying XSTRATA's latest per-ton purchase price to Cardero's attributable share of measured and indicated resources at Carbon Creek would yield a comparable valuation of $265 million. In subsequent discussions, I will place that clear valuation disconnect into the context of Cardero's array of other assets featuring cash, equity investments, and other compelling projects such as the company's district-scale iron project in Ghana.

Accordingly, even though my bullish CAPScall on Cardero Resource remains deep in the red amid this prolonged bout of weakness for met coal stocks, I remain steadfast in my expectation that the market will ultimately correct for the resulting valuation disconnect in these downtrodden shares.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Cardero Resource, Teck Resources, and Walter Energy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (20)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2012, at 4:51 PM, XMFSinchiruna wrote:

    With tremendous appreciation to Ocean Equities for granting me their kind permission to reprint the image, I have posted a map of key met coal deposits and recent consolidation activity in British Columbia's Peace River Coalfield to my blog.

    The map image, along with a few more of my thoughts on Cardero, can be found at my CAPS blog here:

    http://caps.fool.com/Blogs/cardero-resource-in-focus/718165

  • Report this Comment On March 11, 2012, at 5:06 PM, canadacomments wrote:

    VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 6, 2012) - Cardero Resource CorpCardero Resource Corp. ("Cardero" or the "Company") (TSX:CDU)(NYSE Amex:CDY)(FRANKFURT:CR5) announces that it has withdrawn from the non-binding letter of intent ("LOI") with Anglo Pacific Group PLC ("Anglo Pacific") to acquire the Trefi Coal Property as previously announced on November 17, 2011 (News Release NR11-18).

    The LOI, executed on November 15, 2011, related to Cardero's proposed acquisition of the Trefi metallurgical coal project, located in northeast British Columbia.

    Following a period of due diligence, the Company has determined that the contemplated Trefi investment does not fit with its current northeast coalfield strategy.

    Under the terms of the LOI, Cardero will pay Anglo Pacific a break fee of $75,000 plus certain ancillary expenses incurred by Anglo Pacific in connection with the LOI.

    About Cardero Resource Corp.

    The common shares of the Company are currently listed on the Toronto Stock Exchange (symbol CDU), the NYSE-Amex (symbol CDY) and the Frankfurt Stock Exchange (symbol CR5). For further details on the Company readers are referred to the Company's web site (www.cardero.com), Canadian regulatory filings on SEDAR at www.sedar.com and United States regulatory filings on EDGAR at www.sec.gov.

    On Behalf of the Board of Directors of CARDERO RESOURCE CORP.

    Michael Hunter, CEO and President

    What is your take on this development?

    Looks like a promising investment. Must continue my dd.

  • Report this Comment On March 11, 2012, at 6:25 PM, InvestWhatWorks wrote:

    Move Over, Shania Twain? Shatner? Gretzky? Neil Young?! Wow. You have absolutely no idea who's popular in Canada right now. Haha.

  • Report this Comment On March 11, 2012, at 9:34 PM, XMFSinchiruna wrote:

    InvestWhatWorks,

    That's exactly what my wife said! :)

    Sorry to all Canadians for the dated references. Whom would have made better choices?

  • Report this Comment On March 11, 2012, at 10:24 PM, XMFSinchiruna wrote:

    Canadacomments,

    If I can help answer any questions as you conduct your due diligence, please don't hesitate to contact me: sinchiruna@cox.net

    I don't have much in the way of specifics to offer with respect to the pass on Trefi, but my understanding is that further due diligence subsequent to he LOI revealed the deposit was not the right choice as Cardero's second mine development project.

    Personally, I'm impressed by the development, as it confirms management's commitment to navigating an optimal growth trajectory by applying stringent standards to the project selection process. I'm sure Trefi is a fine deposit; but particularly after meeting Mr. Hunter in Toronto, I trust that he acted in the best interest of shareholders by holding out for a different asset to build a second mine upon.

  • Report this Comment On March 11, 2012, at 11:28 PM, InvestWhatWorks wrote:

    @TMFSinchiruna

    Ladies like Ryan Reynolds. He's Canadian.

    For the teens/tweens, you got Justin Beiber. For at least a few more years, Beiber could probably be your go-to Canadian when referencing anything famous/popular.

  • Report this Comment On March 12, 2012, at 6:43 AM, XMFSinchiruna wrote:

    Thanks for the update! I had no idea the Bieb was Canadian. Totally off-point, but Jimmy Fallon does a solid Bieber impersonation.

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