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  For Luscar Coal, a compromise: Sell half, keep half

BENJ GALLANDER and BEN STADELMANN

Wednesday, April 4, 2001

Last October, when the Luscar Coal Income Fund (LUS.UN--TSE) was kicking around $1.50, we wrote: "We can easily see Luscar quadrupling from this level and re-establishing a healthy dividend to boot." While we were thinking in terms of years, the stock has jumped about 175 percent in a matter of months and is in the heat of a takeover play.

The opening incursion in the battle for control of Luscar is complete. The answer to Sherritt International Corp.'s recent offer of $3.50 a share was clear: No thanks. Not that there was much doubt about the response, with the stock trading consistently at about $4 for the past few weeks. It doesn't take a keen sense of the obvious to see that the miner's bid is going nowhere.

The current stage of the process can be dubbed "Show and Tell." Luscar has opened a data centre, where the bean counters of prospective suitors can pore over the numbers to their hearts' content.

Generally we are reluctant to part with our shares when a takeover is in progress. That's because a stock normally will trade a little below the offer price, and we prefer to capture that extra bit of profit and eliminate the sales commission.

When a stock is trading well over the current offer price, in anticipation of a higher competitive bid, the calculation becomes trickier. In the past we have frequently done well during escalating free-for-alls, but we are also mindful of our experience with Journey's End and Noma, where the stocks traded well over the eventual buyout price.

In Luscar's case, picking the eventual winner is a matter of guesswork. There are quite a few players with the stature to pull off a takeover. Canada's Fording Coal, America's Consol Energy, Britain's Rio Tinto, are all prime candidates. Perhaps Jim Pattison's Westshore Terminals, a company we also mentioned in the October article, might want to vertically integrate.

So far, Luscar management has not mentioned any names, content to state demurely that the company has "inquiries from interested parties around the world."

On the minus side, we wonder about coal prices -- after their recent recovery they may move sideways for a while. Like many commodities, most coal is sold not on the "spot" market but under long-term contract.

Luscar settled with European metallurgical coal customers for an excellent 30 percent increase over last year. But given the overall economic problems in Japan, not to mention the weak state of the steel industry, negotiations with companies from that country did not fare nearly as well. We weren't expecting much, and the announced increase of 7 to 8 percent confirmed our fears.

So what was to be done? We elected a comfy compromise -- sell half, keep half. Our sell price of $4.17 was a little shy of our original target of $4.25, but it wasn't the time to quibble over a few cents. We took a lovely profit off the table, and still have a very substantial position should Luscar get lucky. In a competitive scenario, an eventual price in the $5 to $6 range, which would still be below the current book value, is feasible.

The sell half/keep half strategy also makes sense when stock markets are in as much turmoil as we have seen recently. Not that we think companies such as Luscar have anything to do with the bubble of overvalued deflating stocks.

But when sitting on an asset that has soared in value, and economic storm clouds are gathering, it is a good time to reduce exposure.

And if stocks keep grinding lower, having some extra cash on hand to buy up the gems won't hurt, either.

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