Alpha Natural Resources Inc. and Foundation Coal Holdings Inc., each with substantial operations in Pennsylvania, announced a $2 billion merger Tuesday that will create the nation's third-largest coal mining company.
Alpha's acquisition of Foundation Coal combines the nation's largest metallurgical coal producer in Alpha with one of the nation's largest steam coal producers in Foundation. Metallurgical coal is used in steelmaking, while steam coal is used by utility companies to generate electricity.
The combined company will be named Alpha Natural Resources, based at Alpha's home in Abingdon, Va. It will be the third-largest producer in the United States, trailing Peabody Energy Corp. and Arch Coal Inc.
"We've been pretty forthright in that we want to grow," Alpha CEO Michael Quillen said during a conference call. "This is exactly the sort of transforming event we've been talking about for some time. It's a giant leap forward for both businesses."
The merged company will control 59 coal mines and 14 preparation plants and have combined reserves of more than 2.3 billion tons of coal.
Within Pennsylvania, Foundation's assets include two of the nation's 35 largest mines, Emerald and Cumberland, both located south of Waynesburg in Greene County. Both are underground operations and in 2007 produced nearly 13 million tons of coal, according to Energy Information Administration figures. Cumberland employs 741 workers and Emerald, 708.
Alpha Natural Resources, through its Amfire Mining Co. in Latrobe, operates five underground and 13 surface mines in Western Pennsylvania. In 2008, they produced 3.3 million tons of coal and employed about 450.
Among its area operations are the Ondo Extension Mine, the Nolo Mine and the Gillhouser Run Mine, all in Indiana County.
The deal gives Alpha a much broader geographic base, as it will encompass operations in the Northern and Central Appalachian Basins, along with the Powder River Basin in Montana-Wyoming, plus reserves in the Illinois Basin.
Alpha also acquires Foundation's Greene County docking facility on the Monongahela River, which gives it increased transportation flexibility through the river system.
"It's a good deal for both companies," said Pearce Hammond, who follows both for Simmons & Co. International, in Houston. "For Alpha, it becomes more diversified, while for Foundation, you now have metallurgical coal in your product mix."
Besides what Alpha is paying in stock for Foundation Coal Holdings Inc., it will assume $530 million in debt. The companies value the total transaction, including debt, at about $2 billion.
Linthicum Heights, Md.-based Foundation shares gained $4.79, or 20.61 percent, to close at $28.03. Alpha closed down $1.84, or 6.38 percent, at $27.02.
Shareholders of Foundation would receive 1.084 shares of the new company for each share held, or about $32.73 per share — a 41 percent premium over Monday's closing price. Alpha shareholders would own about 59 percent of the combined companies.
Hammond said the logical speculation is that this deal will set off more mergers and acquisitions in the coal fields. Last year, Alpha agreed to a $2.7 billion takeover by Cleveland-based iron ore producer Cliffs Natural Resources. The deal drew objections from Cliffs' largest shareholder and was scuttled in November.
Hammond wondered what will happen with Canonsburg-based Consol Energy Corp.
"One thing that surprises me is that Consol continues to seemingly sit on the sidelines," Hammond said. "It's the big guy that logically will make a move."
Consol spokesman Dan Zajdel declined to comment.
