Strategy

Mining an Emerging Market

Colombia Clean Power &spamp; Fuels was created to tap a lucrative market in South America: metallurgical coal. Despite obstacles, director Daniel C...
Vincent RyanJune 27, 2011

Winston Churchill allegedly said, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” Daniel Carlson and the investors in Colombia Clean Power & Fuels fall in the second slot. Carlson is the former CFO and now a director of Colombia Clean Power, a subsidiary of LIFE Power and Fuels, a holding company that makes investments in fossil-energy and clean-energy technologies. The subsidiary was created a year ago to mine metallurgical coal in Colombia, South America, and turn it into coke for steelmaking.

There is good reason for Carlson and Colombia Clean Power — which has a baseline investment plan of $750 million over five years — to be optimistic. Coal prices are booming, as the price of metallurgical coal has jumped from $80 per ton in mid-2007 to $160 per ton recently. That is causing companies to plow money into coal. Arch Coal just announced the $3.4 billion purchase of International Coal Group, and Japanese trading house Itochu has secured a 20% stake in the Colombian coal assets of Drummond Co., a U.S. miner and processor.

To succeed, though, Colombia Clean Power has to battle the perceptions that coal is a “dirty” energy source and that Colombia is a risky place to do business. Both concerns are legitimate. Regarding the first, for example, American Electric Power recently said it may shut down five coal-fired plants and cut operations at another six facilities in the United States because of possible new emission limits from the Environmental Protection Agency.

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As for doing business in Colombia, political risks haven’t totally subsided. Four Chinese nationals working in Colombia’s oil fields were captured and held hostage — allegedly by leftist guerillas — in early June.

CFO recently spoke with Carlson about the risks and rewards of coal mining in Colombia. An edited transcript of the interview follows.

What’s the opportunity for Colombia Clean Power & Fuels?
The coal-resource owners, we believe, are missing the boat in that they’re just concerned about getting their resource out of the ground as fast as possible and selling it. The sweet spot is to tie a resource to an end-market with what we feel would be the most appropriate technology.

In the center of Colombia you have a lot of coal resources that have not been fully exploited because of the lack of infrastructure. The infrastructure to get the coal to the coast was not there due to the historical problems of Colombia — the Revolutionary Armed Forces of Colombia, drug dealers, etc. We feel the area is very safe now and is ripe for investment.

At the same time, Colombia is a very large agricultural country. Urea is a main ingredient in fertilizers, and Colombia imports 100% of its urea to the middle of the country. But you can “gasify” coal to make ammonia, which you can then turn into urea. So by building a urea-gasification facility in the middle of the country, you have a cheap resource in a high-priced end-market. That’s what drew us to Colombia in the first place.

But your initial concentration will actually be exporting.
There’s very little steel manufacturing in Colombia — there’s only one plant, and it’s small. But from Colombia we can easily serve Europe or Asia because of the dual coasts. One of the best markets for us for metallurgical coal would be Brazil, which has a large and growing steel industry; they have to import 100%. China has also become a net importer of metallurgical coal.

The metallurgical-coal market is tight, and customers are looking for second sources just due to the problems that have happened globally — in particular, the flooding in Australia. Colombia is a natural place to look. The U.S. has a lot, but [mining companies] are getting into thinner seams and more-difficult mining. It’s still there, but it’s more expensive. There’s a lot of steam coal around the world, like in Inner Mongolia, but there’s a very limited quantity of metallurgical coal.

The company just closed on a $22 million offering of convertible preferred stock, and through the acquisition of a shell company in May 2010 it has access to the public-equity markets. What kind of reception did you get from investors?
On the retail side, we got a good reception. We got the first few million dollars out of high-net-worth individuals. Anyone who’s taken the time to do their homework on Colombia realizes that the problems are really behind the country. In fact, I’ve walked around Bogota in the evening many, many times and had no issues with safety. It’s the longest-running democracy in Latin America. Moody’s Investors Service just upgraded the country to investment grade, and we think its currency is going to be stronger versus the dollar over time. Assets are still cheap there. The workforce is educated but inexpensive.

On the institutional side, people who know coal and see what’s going on with coal understand that Colombia is a great opportunity.

Did investors question the viability of coal?
You know, some funds will not touch coal. The fact is, if you want to turn your lights on, you need to have coal-fired power plants. Solar was a big bubble. The disaster in Japan has taken the wind out of the sails of nuclear. The alternative [energy sources] are just not going to have the scale necessary to make a significant impact. And so we’re back to, how can we use coal more effectively? Our near-term strategy is more focused on metallurgical coal. If you’re looking at steam coal for power plants, you could replace it with resources like oil or gas. You can’t replace metallurgical coal.

What’s working with the Colombian government like? Is there political risk?
It’s a very stable government. Dealing with them is a pretty straightforward process. We’ve had some issues just understanding the jurisdictions. Some of these geographic areas have had no projects done of this scale. So are they controlled by the local municipality, the federal government, or the environmental department? Environmental licenses sort of trump every other license. As long as you have your environmental license, you can build your industrial facility on something that’s deeded agricultural, because the federal law trumps local.