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Colonial Coal a sitting duck for acquisition

Photo of Greg MacArthur, Ngozi Paul and Maiko Bae Yamamoto by John Lauener. From pppeeeaaaccceee, by Darren O'Donnell, as part of the Six Stages Festival. HANDOUT

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Here's a speculative flier for investors who like a little dice shaking: a junior metallurgical coal stock favoured by Desjardins Capital Markets.

One of the firm's mining analysts, Jackie Przybylowski, is giving the nod to Colonial Coal International, with a buy rating, but she's also keeping an eye on Cardero Resource, considered a hold in her opinion.

Desjardins is initiating coverage on the two companies, which have prime assets in B.C.'s Peace River coalfield, seen by the firm as Canada's next up and coming coal mining region.

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Ms. Przybylowski favours Colonial because it's inexpensively priced and a sitting duck for a takeover.

"The Peace River Coalfield is a significant growth region for coal and has seen major investments from diversified multinational miners in the past two years. We believe that consolidation will continue, with the current participants in the region being the most likely acquirers," she writes in a recent note to clients.

Among the majors involved are Anglo American, Xstrata, and Teck Resources.

Mr. Przybylowski points out in her note that the majors seem to have recognized the quality of properties in the region, and have been snapping them up. Since 2010, Western Coal, Grande Cache, Cline Mining's Lossan deposit and Talisman Energy's Sukunka deposite have all been sold.

Not all coal stocks are buys. Those producing thermal coal – the type used to generate electricity – have been a disaster because of low natural gas prices and environmental regulations at power plants. The stuff being hauled out of the ground in BC is so-called "met coal," a higher quality and pricier product mainly used for steel making.

There could be some serious money making involved in Colonial, if Ms. Przybylowski is right in her analysis.

Its main properties are close to deposits held by Anglo American, which along with Xstrata is considered the most likely acquirer.

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"Recent transactions in the Peace River Coalfield would imply a value of approximately $200-million ($3.20 per share) for Colonial." That would be great for holders because the share price is around 75 cents.

The firm's price target is a more modest $1.35, but a takeover might offer more sizzle. "Acquisition potential represents upside to our estimates and is not reflected in our assumptions at this time," she says.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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