TORONTO (miningweekly.com) – Vancouver-based Western Canadian Coal (Western) has agreed to buy shareholder Cambrian Mining for about C$120-million in shares, the two companies announced on Wednesday.

"We believe this transaction adds tremendous value for Western shareholders as it globally diversifies our operations, increases geographic diversification of our coal reserves, expands our product mix, regionally balances our sales, expands our reserves and resources, and increases our production profile - both currently and in the long term," Western CEO John Hogg said on a conference call.

Cambrian, which mines coal, gold and antimony, has hard-coking and thermal coal operations in West Virginia, as well as assets in Western Canada, Wales and Australia. Western produces metallurgical coal from mines in British Columbia, Canada.

Both companies have been hit by the economic downturn and financial crisis, and Western agreed in January to extend $36-million loan to cash-strapped Cambrian so that the London-based company could repay other debt.

The combination will create a simplified ownership structure – Cambrian currently owns 34% of Western – and increased diversification, said John Byrne, who chairs both miners' boards.

“From the Cambrian shareholders' perspective, this transaction will remove the holding company discount which we believe has affected the valuation of the company for many years and shareholders will retain a significant interest in a larger and financially stronger group," Byrne added.

The combined company will also have improved sales diversification, with a more balanced sales programme across Asia, Europe and the US, and the transaction will increase Western's coal reserves and resources by 39% and 50% respectively, Hogg said.

"The inclusion of thermal coal to our product mix provides some stability to our earnings as thermal coal tends to trade in a narrow band," he added.

"However, we still have a meaningful presence in met coal to participate in the upside in those markets."

Cambrian shareholders will receive 0,75 common shares in Western for every Cambrian share held, valuing Cambrian at approximately £67,4-million (or C$120-million) and each Cambrian Share at 57p, based on the closing price of 76p for one Western share on May 19, the day before the transaction was announced.

When the transaction closes, Western will issue about 88,6-million new common shares, representing about 29,5% of its issued and outstanding shares.

Hogg will remain at the helm of the combined company, which will continue to trade on the Aim and TSX and will be headquartered in Vancouver.

The transaction requires approval from a minimum of 75% by value and more than 50% by number of shares voted at a meeting of Cambrian shareholders, as well as a majority approval by minority shareholders of Western.

To buy time for the acquisition, which is expected to close in early July, Cambrian has reached a deal with holders of $27-million in convertible notes that were to have matured on May 23.

The noteholders have agreed to extend the maturity date to August 21, but the interest rate will jump from 6,75% to 15% a year on the extension period.

On April 28, Western said that it expected to produce about 1,7-million tons of metallurgical coal during the 12 months ended March 2010, from its Wolverine and Brule mines, in British Columbia, but would keep the Willow Creek mine on care-and-maintenance.

The firm said it had has secured sufficient sales contracts, at strong enough prices, to continue operating the two mines, and forecast an average realised price for its coal of between $120/t and $125/t in the 2010 fiscal year.

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