After Westmoreland Coal Co. (NASDAQ: WLB) announced late Monday that it has completed its acquisition of a New Mexico coal mine for $127 million, shares popped by 21% Tuesday morning before settling back down to a gain of about half that. Is the company nuts? Are investors nuts too?
Not hardly. This may have been a unique opportunity and Westmoreland appears to have made the right decision in buying the San Juan Mine near Farmington, N.M., from BHP Billiton PLC (NYSE: BHP). The mine is a so-called mine-mouth operation located near the coal-fired San Juan Generating Station (SJGS) and last year produced 8.8 million tons of coal from a single longwall face, all of which was contracted to the SJGS.
According to Monday’s press release, the San Juan mine contains an additional 148 million tons of coal, for which Westmoreland paid less than $1 a ton. Not only that, Westmoreland did a loan deal with a subsidiary of PNM Resources Inc. (NYSE: PNM), which owns the SJGS. Under the terms of the $125 million senior secured non-revolving term loan, which matures February 1, 2021, Westmoreland is paying LIBOR plus 7.5% with no prepayment penalty, and structured so that Westmoreland must pay more than half the balance due in the first two years.
The coal company’s contract with SJGS runs through 2022 and requires the power generator to purchase 100% of its coal supply from Westmoreland, with tonnage and price adjustments made quarterly. The mine has supplied all the coal used to operate SJGS since the plant opened in 1973.
The downside, if there is one, is the two of the four coal-fired generating units at SJGS will be retired by the end of 2017. SJGS said that its customers will save $300 million over the six-year life span of the contract with Westmoreland, lowering their bills by approximately 5%.
In early afternoon trading Tuesday, Westmoreland’s shares were up 9.7% at $6.10 in a 52-week range of $3.44 to $30.92.