Metallurgical coal miners are still dropping like flies in a powerhouse of a consolidation cycle that shows no signs of quitting; unless, of course, it simply runs out of strategic targets.
Arch offered a 32% premium over International's closing price from Friday with a bid of $14.60 cash per share. The $3.4 billion deal would transform Arch Coal into the second-largest met coal miner in the U.S. behind Alpha, and spawn a 47% explosion in Arch's pro forma 2011 met coal output, from 7.5 million tons to 11 million tons. By 2014, the addition of production from International's Tygart Valley No. 1 mine could bring pro forma capacity to 14 million tons per year.
Arch had already adopted a heavy emphasis upon growing access to the export-bound segment of the domestic coal market prior to this move. After all, global demand has fully emerged as the driving force behind growth in the domestic coal industry. The miner recently secured a 38% interest in a coal terminal in Washington -- where rival Peabody Energy
Following the acquisition, Arch could no longer be properly characterized as a Western-focused miner, since pro forma revenue would be evenly divided between Eastern and Western operations. With sizable operations in every major U.S. coal basin, Arch becomes perhaps the closest available proxy for broad U.S. coal market exposure among the mining equities. If this deal goes through, and it has received the unanimous endorsement of both companies' boards, I may have to add a sixth selection to my list of top coal picks for the next 20 years. It is worth noting, however, that several legal challenges emerged shortly after the deal was announced, referencing allegations of a breach of fiduciary duty by the board of International Coal.
As the pool of potential targets for met coal acquisitions continues to dwindle in number, the implied scale of future deals must be seen to rise accordingly. As such, Patriot Coal