A reader recently wrote to me expressing concern about the beating coal shares have received in recent weeks, and wondering whether it indicates softening demand from China, or some other fundamental shift. The reader sought reassurance that we have witnessed merely a correction, rather than the end of a trend. Since earnings season is upon us, and mergers and acquisitions are flying at a hawk's pace, Fools have the luxury of abundant evidence to answer this important question.
Last week, I reported on the epic second-quarter profits of Fording Canadian Coal Trust (NYSE: FDG ) , which owed largely to its 60% stake in the Elk Valley coal project. Meanwhile, Teck Cominco (NYSE: TCK ) , Fording's operating partner and 40% stakeholder in the Elk Valley coal project, echoed Fording's bullish tone.
Continuing a relentless onslaught of merger and acquisition activity within the coal sector, Teck Cominco announced Tuesday a $14.1 billion bid to acquire Fording, at about a 17% premium to the company's average share price over the last 20 days. The market seems to think Teck Cominco is getting a pretty sweet deal: Its shares soared 13% upon the news.
Teck's bid for Fording is the latest in a flurry of consolidation within the industry, specifically within the coking coal segment. Cleveland-Cliffs (NYSE: CLF ) is gunning for Alpha Natural Resources (NYSE: ANR ) , over the objection of a hedge fund that owns an 18.4% stake in the former. Steelmakers POSCO (NYSE: PKX ) and ArcelorMittal (NYSE: MT ) each picked up stakes in Australian miner Macarthur Coal.
Given the consensus view among industry insiders that coal market fundamentals have years of strength ahead, the unmistakable global race to acquire such resources through acquisitions, and the strong earnings that justify those runaway coal shares, I conclude that the coal bull has barely broken a sweat.