Multibillion Coal Mine Sale, Value Hard to Recreate Among Rivals

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CONSOL Energy Inc. (NYSE: CNX) announced Monday morning the sale its Consolidation Coal Company (CCC) subsidiary to a subsidiary of privately held Murray Energy Corp. for $3.5 billion. In addition to the five West Virginia coal mines, Murray also is acquiring liabilities that totaled $3.37 billion at the end of 2012 and are expected to total a present value of $2.81 billion at the end of 2013. The transaction is expected to close by the end of this year.

The five mines involved in the transaction produced 28.5 million tons of thermal coal in 2012, and Murray is acquiring approximately 1.1 billion tons of Pittsburgh No. 8 seam coal. CONSOL will receive a cash payment of $850 million when the deal closes and expects another $184 million in future royalties and other payments. The balance sheet portion of the liabilities assumed by Murray totals $2.43 billion, and the off-balance sheet portion related to a 1974 pension plan totals $941 million at the end-of-2012 value.

If coal has any long-term value, Murray is getting a very good deal here: reserves totaling 1.1 billion tons for a little less than $1 a ton in cash. CONSOL wanted to get out from under the balance sheet obligations of CCC, and to do so it had to toss in something of value. About 88% of the liabilities Murray is assuming are in the category of other postretirement benefit plans.

What does this sale indicate about future sales of coal assets? CONSOL, which has been moving into natural gas and liquids production, will retain its mines in Virginia and Pennsylvania, including the company’s Buchanan mine, which produced 1.1 million tons of low-vol (low volatility) coking (or metallurgical) coal, according to the company’s preliminary statement on third quarter 2013 operations. Metallurgical coal commands a substantial premium to thermal coal, such as that produced in the mines involved in this transaction.

Other large producers of thermal coal in the United States include Alliance Resource Partners L.P. (NASDAQ: ARLP) and Cloud Peak Energy Inc. (NYSE: CLD), but the most endangered by the drop in thermal coal demand and prices is Arch Coal Inc. (NYSE: ACI). Spot prices for thermal coal have fallen to around $54 a ton from a high of about $143 a ton five years ago. If the price of Central Appalachian (CAPP) coal does not increase, Arch could run into severe liquidity troubles.

A deal such as the one that CONSOL has announced will not help Arch. It has too much debt and its war chest of $1.4 billion in cash, which includes $435 million from the June sale of its Utah mines, needs to be beefed up to carry the company. Arch has total debt of about $5.1 billion, trailing coal mining’s debt leader Peabody Energy Corp. (NYSE: BTU).

A deal to shed assets in exchange for cutting liabilities is not going to help Arch much. It has to hold out for cash, and the sale by CONSOL, even if for all cash, only values the coal at around $3.50 a ton. Production costs can add up to $45 a ton, leaving precious little profit with prices around $54 a ton. Buyers are going to be scarce on the ground.

Coal demand is recovering slightly as natural gas prices rise, but the recently proposed rules from the Obama administration related to carbon emissions virtually guarantee that no new coal-burning power plants will be built in the United States.

Shares of CONSOL rose fractionally about half an hour after markets opened on Monday to $38.15, in a 52-week range of $26.25 to $39.23.

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