Good things come to those who wait. That might have worked well as an ad slogan for ketchup back in the 1980s, but when it comes to striking transformational business deals, good things come to those who go out and make it happen.
For Appalachian coal miner Alpha Natural Resources (NYSE: ANR ) , a wild twist of fate has produced a complete about-face from nearly being gobbled up by iron ore specialist Cliffs Natural Resources (NYSE: CLF ) last year, to now orchestrating its own major coal merger. In a $2 billion all-stock transaction that will add massive thermal coal capacity to the company's market-leading metallurgical coal production, Alpha will subsume Foundation Coal Holdings (NYSE: FCL ) , and in the process build a more recession-proof foundation for future growth.
On the heels of Arch Coal's (NYSE: ACI ) $761 million mine purchase from Rio Tinto (NYSE: RTP ) in March, Alpha Natural Resources again stokes the flames of coal consolidation following a disastrous acquisition by Teck Resources (NYSE: TCK ) last summer and Cliffs' abandoned $10 billion bid for Alpha. Given the dramatic way in which domestic steel furnaces have gone cold since that time, it's now clear that Cliffs stakeholder Harbinger Capital Partners was absolutely correct to oppose that deal. In the midst of this persistent contraction in industrial activity, thermal coal rather than metallurgical coal offers relative stability with far less pronounced fluctuations in demand.
With massive thermal coal reserves and prolific production in Wyoming's Powder River Basin, Foundation Coal Holdings not only tips Alpha's pro forma production profile convincingly in the direction of thermal coal (86% of pro forma 2008 sales), but also significantly expands Alpha's geographical footprint and economy of scale. The combined company will rank third among domestic producers behind Peabody Energy (NYSE: BTU ) and Arch Coal, without sacrificing that all-important liquidity. Alpha will emerge with $743 million in liquidity (second-best in the sector), and one of the sector's lower proportions of debt to trailing EBITDA (1.4 times).
As a bonus, Alpha will benefit from Foundation's favorably priced supply contracts that I highlighted back in February … when Foundation posted a 425% increase in net earnings. Alpha expects the deal to become accretive in 2010 with $45 million or more in synergies. Despite my conviction that the coal sector at large has more pain on the near-term horizon, I find this particular deal to be the right move at the right time for both of these intrepid miners.