Wednesday, May 13, 2009


Alpha Natural Resources Inc.’s $2 billion acquisition of Foundation Coal Holdings Inc. gives the company access to low-cost Wyoming surface mines as stricter regulation makes work in Appalachia costlier.

Alpha will become the third-biggest U.S. coal producer when the purchase is completed in September, with pro forma 2008 revenue of $4.2 billion from 59 coal mines and 14 preparation plants and reserves of more than 2.3 billion tons.

Alpha Chief Executive Officer Michael Quillen has been looking for partners since a plan to be acquired by Cliffs Natural Resources Inc. for $2.88 billion failed in November because of a steel glut. With Foundation, Abingdon, Va.-based Alpha gains entry to the largest and least-expensive U.S. reserves in Wyoming’s Powder River Basin and access to more coal types for blending.

“Alpha’s found a great way to move into the Powder River Basin at a pretty good price,” said James Rollyson, an analyst at Raymond James Financial in Houston who rates both companies as “outperform” and owns neither.

Foundation Coal, based in Linthicum Heights, Md., jumped $4.82, or 21 percent, to $28.06 a share in New York Stock Exchange trading and has more than doubled since the start of the year. Alpha fell $1.80 to $27.06. The shares had gained 78 percent this year.

Foundation stockholders will get 1.084 shares of the new company for each share they own, worth an estimated $32.73 per share based on Alpha’s May 8 closing price.

The deal, including $530 million of Foundation’s net debt, comes with a 37 percent premium to Foundation’s average share price.

“This is exactly the sort of transformational event that Alpha’s been seeking for some time,” Mr. Quillen said Tuesday on a conference call. Foundation “will complement Alpha’s valuable net coal assets and lessen revenue stream dependence on volatile swings in the steel sector.”

Alpha’s production cost averaged $58.61 a ton in the first quarter, triple Foundation’s $19.28 a ton average. Alpha’s costs are higher because mines in Central Appalachia are deep underground and require more earth removal and disposal, as well as more safety regulations.

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