Commodities & Metals

Merger Bonanza, The Shrinking Coal Sector (ACI, ICO, ANR, MEE, WLT, RIO, RFLMF, CNX, BTU, PCX, JRCC, KOL)

Arch Coal, Inc. (NYSE: ACI) has finally pulled the trigger on an acquisition that has probably been in the works for months. The coal miner has announced an all-cash acquisition of International Coal Group, Inc. (NYSE: ICO) worth $3.4 billion. The mystery is why it took so long.

When Alpha Natural Resources, Inc. (NYSE: ANR) acquired Massey Energy Co. (NYSE: MEE) at the end of January, Alpha paid about $8.5 billion for a company that had suffered a mine explosion that killed 29 miners and that had just fired its long-time CEO. The Alpha-Massey deal was no bargain, and that might have been what cooled Arch’s desire to jump into the M&A game.

Consolidation in the coal sector has been running pretty hot since the middle of last year. Walter Energy, Inc. (NYSE: WLT) paid about $3.3 billion for Canadian miner Western Coal Corp. in a deal that closed in early March. Mining giant Rio Tinto plc (NYSE: RIO) recently raised its stake in Australian coal miner Riversdale Mining Ltd. (OTC: RFLMF) to 72%.

There is also some speculation that Consol Energy Inc. (NYSE: CNX) could be looking to sell its metallurgical coal reserves in Australia to focus more on natural gas production in the Marcellus shale play. A possible buyer for those assets would be Peabody Energy Corp. (NYSE: BTU), which already has a substantial mining presence in Australia.

International Coal had been mentioned last year as a possible takeover target for Massey. That happened under the leadership of Massey’s former CEO who was struggling to keep the company independent. When he was fired, Massey’s acquisition by Alpha was just a matter of time.

And there sat International Coal, with a market cap then of around $1.7 billion. Paying a 30% premium, Arch could have bought the company then for about $2.2 million. Instead, Arch decided to dither around and pay $3.4 billion now. A fair part of the increase in International Coal’s market cap is the result of speculation for a takeover.

The next speculative targets will probably be Patriot Coal Corp. (NYSE: PCX) and James River Coal Co. (NASDAQ: JRCC). James River just completed its acquisition of privately held International Resource Partners, a West Virgina miner with metallurgical coal assets.

James River also recently failed to complete a tender offer for outstanding 9.375% senior notes due in 2012. The company instead will redeem the notes on June 1, 2011. James River’s market cap is around $800 million.

Patriot Coal’s market cap is about $2.3 billion, and it will certainly get some attention as a takeover. The company was spun-off from Peabody in 2007, and focused on domestic growth while Peabody started looking at international opportunities. Whether or not Peabody will want to bring Patriot back into the fold is questionable.

If Peabody passes on Patriot, perhaps an international buyer will turn up. US companies that are large enough to swallow Patriot are already busy digesting earlier deals. Of course Patriot could merge with another coal company, say James River. But that doesn’t make an awful lot of sense.

In any event, International Coal is up more than 30% today, having posted a new 52-week high of $14.46, just shy of the $14.60/share price offered by Arch. Arch shares are down fractionally. Patriot Coal is up nearly 7%, to $26.94, near the top of its 52-week range of $9.76-$29.20. James River is also up, more than 5%, to $24.50, within its 52-week range of $14.44-$25.12. The Market Vectors Coal ETF (NYSE: KOL) is up about 0.5%, to $51.22, close to its high in a 52-week range of $28.35-$51.87.

Paul Ausick

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