By CHRIS V. NICHOLSON
The Itochu Corporation, the Japanese conglomerate and trading firm, said Thursday that it would pay $1.5 billion for a 20 percent stake in a Colombian coal project run by the Drummond Company, the coal mining company based in Birmingham, Ala.
Itochu, which is also involved in textiles, chemicals, food and real estate, said it would spend 126.5 billion yen for the mine interest, as well as exclusive rights to market the coal in Japan. It will also seek to sell the coal to electric power utilities and other consumers in Asia.
Drummond said last July that it had hired Bank of America Merrill Lynch
to help it find new financial backing for its Colombian project, and global mining companies like Xstrata, Rio Tinto
, Vale, Vedanta and Essar were reported to have expressed interest.
The transaction, announced Thursday and which Itochu expects to complete within three months of receiving the necessary approvals, gives Drummond’s total Colombian operations an implied value of $7.6 billion.
The Japanese firm is in talks with the government agency Nippon Export and Investment Insurance of Japan to insure the coal. Successful negotiations will effectively mean the deal has the backing of the Japanese government, which is searching to fill a gap in energy supply since the March tsunami devastated the country’s nuclear energy production.
Drummond has been mining coal in Colombia since 1995, and is sitting on reserves there estimated at 2 billion metric tons, with current production at 25 million metric tons per year. Founded in 1935, Drummond is embarking on a process to become a “major international diversified mining company.”
The company has five coal concessions in the country, all of them open pit mines located in northern Colombia near the Venezuelan border. They produce thermal coal, and have an estimated life span of more than 50 years.
Thermal coal, also known as steam coal, is generally ground to a powder and used to drive turbines that generate electricity, in contrast to coking coal, which is used to turn iron into steel.
Demand for thermal coal has grown alongside demand for more power generation in emerging markets.
Itochu, which is already involved in mining and minerals, said Thursday that it hoped to raise its equity share in coal mining operations worldwide. The Japanese firm has stakes in mines producing eight million metric tons a year, and is aiming to hit 20 million metric tons a year within four years.
Drummond said in a separate statement that it would use the cash from Itochu to expand its Colombian exports. The investment will feed a five-year capital program worth $1.3 billion that will purchase more efficient mining equipment, as well as build a direct-loading port facility at the behest of the Colombian government.
“Drummond believes that this partnership will facilitate the further opening of the Asian coal markets to exports from Colombia,” the company said.
Drummond and Itochu first collaborated in the 1960s, exporting American metallurgical coal to Japan. The Alabama company is the largest merchant coke producer in the United States.