TORONTO (miningweekly.com) – Alpha Natural Resources has agreed to buy Maryland-based rival Foundation Coal for about $1,4-billion in shares, creating what will be the nation's third-biggest coal miner.

The merged company will be better able to weather the short-term challenges facing coal producers, as well as to take advantage of an anticipated rebound in demand and prices for coal, said Alpha CEO Michael Quillen.

He has been looking for opportunities to grow by merger or acquisition since bulk-commodities miner Cleveland Cliffs (now Cliffs Natural Resources) broke off plans in November to buy Alpha, because of market uncertainty and opposition from a key Cliffs shareholder.

“This is really the sort of transformational event that Alpha's been talking about for some time now, and we believe that this is also the right time to do it,” Quillen said on Tuesday.

Besides assets in Central and Northern Appalachia, Foundation produces coal from surface mines in the Powder River Basin, in Wyoming, which are not only less expensive to operate, but are also not facing the same regulatory challenges as the Appalachian region, where Alpha has all its assets.

While surface mines in the Eastern US are coming under increased environmental scrutiny and regulatory challenges, operations in Wyoming do not face the same degree of opposition.

The Foundation acquisition “does actually spread out the risk", Quillen said.

Foundation also produces mainly thermal coal for power generation, which will help diversify Alpha's metallurgical-coal-heavy production mix.

The combined company, which will be 59% owned by current Alpha shareholders and 41% by Foundation, will operate 59 coal mines and 14 preparation plants, and will own more than 2,3-billion tons of coal reserves.

"We're creating a true US leader in the energy sector with balance, size and scale,” Quillen said.

The firms also expect to achieve at least $45-million a year in savings, as a result of synergies, beginning in 2010.

US coal producers, including the two largest – Peabody Energy and Arch Coal – have reduced production levels and sales forecasts for this year, after sales volumes fell sharply because of weak demand for both steel and electricity.

Alpha and Foundation have both also curtailed operations, and Foundation CEO James Roberts indicated last week that the company was expecting some utilities to defer contracted shipments this year.

However, speaking on a conference call on Tuesday, he said that demand for steel and electricity are expected to rebound in 2010 and beyond.

“And when the economy recovers, supply [of coal] will struggle to keep up with demand, so prices will recover,” Roberts said.

Foundation shares leapt 20,74% on Tuesday, to $28,06 apiece by 16:01 in New York. The stock traded as high as $31,54 earlier in the day.

Alpha stock slid 6,24%, to $27,06 a share.

STRUCTURED TO GROW

Once the Foundation transaction has closed, which is expected to be in the second half of the year, and the businesses are properly integrated, Alpha is keen to take advantage of further acquisition opportunities, Quillen said.

“The way we've structured this balance sheet is to continue to grow, and to take advantage of opportunities – whether they are distressed or whether they are just in different geographic basins,” he said.

“We are still going to be around in the M&A environment going forward.”

After the tie-up, the new company will have about $750-million in cash, cash equivalents and undrawn credit.

Under the terms of a definitive merger agreement, Foundation shareholders will receive 1,084 shares of the new company for each Foundation share held, while Alpha shares will automatically become shares of the combined company.

Alpha Natural will issue about 50-million new shares, and will assume $530-million of Foundation's net debt, for a total transaction value of around $2-billion.

The deal values Foundation stock at $32,73 a share, which was a 37% premium to the company's average closing share price over five days prior to the deal being signed.

The deal requires approval from shareholders representing a majority of the outstanding shares in each company.

Quillen said he was confident of shareholder support for the deal, and did not expect to encounter the sort of difficulties that scuppered the Cliffs transaction.

The new company will retain the Alpha name and will be headquartered in Abingdon, Virginia.

Quillen will be appointed chairperson and Alpha president Kevin Crutchfield will be CEO, while Kurt Kost, Foundation's president and COO, will become president of the combined company.

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