A Harbinger of the Coal Deal to Come

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Coal stocks jumped off a cliff Thursday, placing a soot-covered exclamation mark on a gut-wrenching period for commodity stocks. For one hybrid iron ore and coal producer, the climb back up the cliff is now more likely to involve a major acquisition.

While hedge funds were reportedly unloading positions in droves yesterday amid this acute global credit crunch, one hedge fund sought permission to increase its stake in raw materials miner Cleveland-Cliffs (NYSE: CLF). Harbinger Capital Partners wanted shareholder approval to double its 15.6% stake in the company in order to block Cleveland's proposed acquisition of coal miner Alpha Natural Resources (NYSE: ANR).

Harbinger considers Cleveland's move to acquire Alpha Natural Resources a "profound strategic mistake," suggesting that coal mining is a much riskier endeavor than Cleveland's prior core business of iron ore mining. Shareholders clearly disagree, denying Harbinger permission to purchase the stake and thereby block the transaction. Although a separate vote will be required to finalize the bid for Alpha, I believe today's result suggests that shareholders are aligned with the direction the company is moving in.

Although the economic revelations of this September to remember may very well negatively impact the global steel industry, I would argue that much of that impact has already been priced into shares that have lost 60% of their value over the past month, and 72% from their 52-week highs. As a result, the value of Cleveland's bid has contracted from $10 billion to $4 billion. Following an epic move into Australian coal and iron ore production, this next step in the company's transformation will create a 50/50 hybrid of metallurgical coal and iron ore production. In my view, this creates the potential for a strong negotiating stance for pricing contracts with steelmakers like POSCO (NYSE: PKX) that rely heavily upon the outsourcing of these raw materials.

With another deal announced last week in Australia, it appears the pattern of rapid consolidation remains alive and well in the coal space. Teck Cominco's (NYSE: TCK) acquisition of Fording Canadian Coal Trust (NYSE: FDG) recently gained final approval. Furthermore, contrary to the beating that shares of coal miners like Massey Energy (NYSE: MEE) and Arch Coal (NYSE: ACI) have endured, spot prices for coal remain solidly above their historical range. With prices standing strong and consolidation activity unabated, I see the derailed coal train getting back on track and Cleveland-Cliffs riding on board.

Further Foolishness:

• Teck's powerful purchase
• Peabody signed a major coal deal with Chinese partners.
• 7 Signs Coal Is Still Hot