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Saluting Patriot Coal

A week ago, Peabody Energy (NYSE: BTU  ) publicly initiated a spinoff of Patriot Coal, a subsidiary that includes its Appalachian properties. That didn't take too long. Less than a month ago, I noted the company's hiring of Morgan Stanley (NYSE: MS  ) to explore strategic alternatives for these assets.

Previously, I viewed the spinoff as primarily an unloading of a troublesome piece of Peabody's increasingly global coal business. I stand by my conclusion that "Peabody is going where the growth is." However, there's an aspect of the Patriot Coal business that I had not adequately considered.

In its registration statement with the SEC, Patriot Coal talks about strategies to maximize operational performance, keep customers happy, and pursue growth by various means. But there's one core strategy that stands out from all the rest:

We are well positioned to be a consolidator in Central Appalachia. Our reserves and operations in Central Appalachia are contiguous or in close proximity to numerous small- and medium-sized operators. The breadth of our reserves creates opportunities for growth through acquisitions, reserve transactions and joint ventures involving those operators who seek to monetize their holdings.

There you have it. Consolidation is the key to understanding Patriot as it sets forth on its own.

Consolidation is also music to any coal investor's ears. With a less-fragmented Appalachian region, think about how much more effectively industry participants like Arch Coal (NYSE: ACI  ) and International Coal Group (NYSE: ICO  ) will be able to coordinate "disciplined production." That's fancy talk for cutting production in the face of an inventory glut in order to keep prices high. I think the market will reward Patriot for successful consolidation moves. For that reason, Peabody shareholders should consider hanging onto their Patriot shares in order to realize that value over time.

More sooty foolishness:

Fool contributor Toby Shute doesn't own shares in any company mentioned. The Motley Fool has a disciplined disclosure policy.

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