Nicholas Watson in Prague -

If investors in Poland's only listed coalmine Bogdanka had been hoping that the company's better-than-expected third-quarter results might prompt New World Resources (NWR) to sweeten its hostile bid price, then they will feel let down by the Czech miner's dismissal of the results as "disappointing."

"The results are slightly disappointing from our point of view, especially because we didn't expect the operating margins to deteriorate and we were hoping the full-year target would be updated and I didn't see anything on that," NWR's chief financial officer, Marek Jelinek, tells bne.

Bogdanka reported on November 8 that its net profit fell by 6% on year to PLN85.5m (€21.7m) in the third quarter, which was better than the consensus figure of PLN76m. The coalminer kept its full-year profit guidance at PLN201m, though the company should top this because it has already booked PLN193m in earnings for the first nine months of 2010.

Even before the release of the results, NWR had been insistent that it would not be raising its bid for Bogdanka. NWR launched its hostile bid for the Polish miner on October 5, offering PLN100.75 per share in an all-cash offer worth €857m. The offer is certainly attractive on several measures. This was a 13% premium to the pre-announcement closing price of PLN89.20. The IPO of Bodganka just over a year ago was priced at PLN48 per share, while the Polish Treasury sold 46% of Bogdanka in March this year for PLN70.5 per share to Polish pension funds, meaning that NWR is offering a 43% premium on top of this. The offer values the firm at a price/earnings multiple of 18.1x, compared with an average P/E of the Polish stock market of 13.4x. On a cash flow basis it's about 8x Ebitda, which compares favourably with comparable transactions and trading multiples in the mining sector internationally. "Whichever metrics you want to use, we think our bid is attractive. Our valuation compares very favourably with what other people have paid in emerging markets in the coal sector; by some metrics, it's if anything a bit high. If you look at the valuation based on reserves, it's approximately $3 per tonne and other transactions in the sector were completely different numbers," says Jelinek.

As a further sweetener, NWR will give current Bogdanka shareholders the chance to reinvest into the combined entity through a new share issue. "The offer implies a P/E of 18.1x, whereas today NWR trades at 9x, so if Bogdanka shareholders accept the offer, they can reinvest their cash into NWR, locking in their profit but still keeping the exposure and upside seen in the coal sector and Bogdanka," Jelinek says.

It's this belief, plus the fact that NWR has two other Polish projects on the go - a 50-year mining concession at Debiensko and exploration concession for the dormant Morcinek mine, both located in the same Silesian Basin where its mines in the Czech Republic are located - and several other international takeover targets in its sights in Poland and Ukraine, that's driving the Czech firm's hardball approach; the only part of the deal up for discussion is lowering the level of shareholder support, currently 75%, required for it to go through.

White knights

For its part, Bogdanka management, backed by the unions, argues the bid undervalues the company and are now casting about for a white knight like the local coking coal miner JSW, which NWR also says it's looking at. "From the point of view of operating management, we're very close [to JSW]. This kind of merger would be a great idea, it would be a better idea than merging with NWR," Bogdanka's CEO, Miroslaw Taras, was quoted by Reuters as saying following the release of the third-quarter results.

NWR acknowledges that Bogdanka's management is only doing what is natural in the circumstances - trying to get the very best deal for its shareholders. However, it says few doubt in private the strategic logic of the merger. As one of the very few private sector and profitable coal miners in the region, NWR feels it's in prime position to lead the upcoming consolidation of emerging Europe's coal industry and argue Bogdanka is an important first step in this process. The combined group will also have a more balanced product mix: NWR is predominantly a coking coal producer while Bogdanka is almost 100% a thermal coal producer.

NWR's insistence it will walk away if its offer hasn't won out by the time the tender closes on November 29 could also have something to do with a reluctance to have to go back to its shareholders. NWR is domiciled in the Netherlands and under Dutch law increasing the offer price would require it to call another general meeting, which would take 42 days. It was many of these same shareholders who in April 2009 were so overwhelmingly dismissive of the management's attempt to buy a 25% stake in Ukrainian iron ore producer Ferrexpo that NWR didn't even end up calling the promised extraordinary general meeting to vote on the deal. Shareholder soreness can be largely put down to NWR's dismal share price performance since the IPO in 2008; the shares were priced at CZK425.83 and soared as high as CZK620 before falling back to earth as oil and commodity prices fell and then the crisis struck. On the day of Bogdanka's results, NWR's shares closed at CZK216, still a far cry from their IPO level.