Alpha Natural Resources Announced Earlier

Alpha Natural Resources announced earlier this month that they intend to purchase Foundation Coal for $1.4 billion. The deal is to be completed with stock and the acquisition of Foundation's debt and will result in the creation of the nation's third-largest coal producer. The move comes amid speculation of another round of consolidation in the coal industry, due to a number of factors in the external environment (Huber, 2009).

Alpha Natural, located in Appalachian Virginia, is a major coal producer, with sales of $2.5 billion last year. The company operates a total of 61 mines and 11 preparation plants throughout the region. Alpha Natural has nearly 3800 employees scattered throughout this wide range of sites (MSN Moneycentral, 2009). The company has exhibited a steady growth trajectory and earned $200 million last year. Alpha Natural has a strong liquidity position, and has rapidly improved its balance sheet over the past five years, a function of steady profits. The company is currently flush with cash, which has given it the financial strength needed to be a buyer (Ibid).

Foundation Coal is based in Maryland and operates 12 mines, both in Appalachia and in Wyoming. The company earned revenues of $1.7 billion last year. The company is focused almost exclusively on steam coal, and markets coal produced by other companies in addition to its own. The company is significantly less profitable than Alpha Natural, earning just $11.55 million on its revenues last year. While revenue growth has been steady, profit growth has been more erratic, reflecting the relative weakness of steam coal to metallurgic coal. Foundation's balance sheet is weak, with marginal liquidity and a high debt-equity ratio. The company has not improved performance in the past four years and its equity position has eroded as a result (Ibid).

Foundation Coal's performance can be linked to the relatively poor market for steam coal, which 98% of its volume and 89% of its sales (Ibid). The industry has been characterized of late between falling prices, declining demand and tight credit (Huber, 2009). There is also concern that the Obama administration will introduce more environmental legislation (Ibid). The coal market is becoming more challenging. The rapid increase is crude oil prices in the first half of 2008 had sparked a boom in coal as a substitute product. However, with the speculative bubble in crude prices coming to an end, coal prices too have fallen, between 37-72% depending on location (Commodity Online, 2009). The strongest demand for coal is seen in China and India and although there has been an increase in seaborne coal trade (Reuters, 2009), this does not strongly affect the U.S. market. The increasing sophistication of the coal market, and the demand internationally, has lead to a need for ever-larger coal companies. Analysts have long predicted another round of consolidation in response to these environmental changes (Huber, 2009).

The deal is viewed as strong strategically by analysts. The combined entity will have a large geographical footprint and will compete strongly in both the metallurgic and steam coal businesses (Ibid). The company expects to win cost savings of $45 million per year beginning in 2010 (Corridor, Inc., 2009). The financial strength of Alpha Natural will help improve Foundation's business, as that company had been treading water financially for years.