Friday, July 31, 2009

Alpha Natural Resources (ANR) Finalizes Foundation Coal (FCL) Deal to Secure #3 Spot in US

It's been a while since we've looked at the coal space - we own one name as a small position, but this was a theme that was one of our big winners in late 2007 and 1st half 2008. Further, we made a strategic shift from thermal coal to metallurgical coal in the spring of 2008 just before the companies with an emphasis on metallurgical made a huge surge. Alpha Natural Resources (ANR) was our top dog - just imagine the joy we felt as one of our top positions was in the news as a source of a buyout offer by iron ore company Cleveland Cliffs (CLF). Our out performance for 2008 would jump even further we thought! Virtual hands slapped our virtual back in congratulations. But as only as lady luck would have it, we had just a few hours of joy as the stock began to behave strangely - indeed after a quick surge Alpha Natural Resources stock sold off.

Of course, we were clueless as to why it was - only "those in the know" knew. Information is everything on Wall Street... and so we learned later that Philip Falcone of hedge fund fame [Harbinger] (a major owner of Cleveland Cliffs) immediately let it be known he hated the deal and would not allow the executives to fulfill their strategic initiative. While Goldman Sachs surely knew within minutes and was surely able to book big profits on the short side while the rest of us were buying the "dip", it took a few days for the peasants (hand raised) to find out. And realize we were the dips!

And so we now see the era where hedge fund managers have more power over companies than their own executives. (I'm all for shareholders having a major say in companies but this one went over the top) After many months of fighting, and even rumors of a new suitor for our damsal in distress [Jul 31, 2008: - Mittal (MT) Considering Bid for Alpha Natural Resources] (natch) the hedge fund man got his way and the deal died. [Nov 18, 2008: Cleveland Cliffs, Alpha Natural Resources Call off Merger] Even after a last ditch attempt by Cleveland Cliffs to get its other shareholders to consolidate against hedge fund man. [Aug 22, 2008: Bloomberg: Cleveland Cliffs Asks Shareholders to Block Harbinger] Ironically Falcone's fund imploded later in the year. And you thought there was nothing in the stock market so interesting as a typical soap opera. But that did not make up for him taking away our rewards for his own personal profit motive.

[Aug 15, 2008: Harbinger Seeks to Raise Stake in Cleveland Cliffs]
[Jul 25, 2008: More Drama at the Cleveland Cliffs Corral]
[Jul 16, 2008: Thoughts on Cleveland Cliffs (CLF), Alpha Natural Resources (ANR) Deal]

Cleveland Cliffs was so sure the deal would happen that they renamed the company - it is now Cliffs Natural Resources. But it's without Alpha Natural Resources. Like a jilted lover who knew her suitor's father (Falcone) would not allow the marriage, Alpha Natural has found a new spouse... in the form of Foundation Coal (FCL). This deal closed today, making ANR the #3 player in the US. And in a more than ironic twist, Alpha Natural Resources largest shareholder - Duquesne Capital Management - opposed the deal. But this time, the hovering parent did not get his way.
  • Alpha Natural Resources completed the takeover of rival Foundation Coal Holdings on Friday, winning shareholder approval of a deal that creates a national power out of two regional players even as the recession hammers energy demand.
  • Abingdon, Va.-based Alpha now has 6,200 employees and 61 mines in Wyoming, West Virginia, Kentucky, Pennsylvania and Virginia. And with 91 million tons of annual production, Alpha ranks as the nation's third-largest coal mine operator behind St. Louis-based giants Peabody Energy and Arch Coal.
  • Alpha now is expected to generate about $4.2 billion in annual revenue, will have about $400 million in cash and more than $1 billion in total liquidity. It also will control 2.3 billion tons of reserves.
  • Alpha did not release a vote total, but the deal had to overcome opposition from its largest shareholder. Among other things, Duquesne Capital Management argued the deal would reduce Alpha's financial flexibility.

And so it appears the once jilted, now is the attack dog. They are not done yet it appears.
  • Alpha Natural Resources Inc., which today became the third-largest U.S. coal company with shareholder approval of its $2 billion purchase of Foundation Coal Holdings Inc., is open to more acquisitions.
  • “At the end of the day, we don’t view the Foundation transaction as the ‘be all and end all,’” Chief Executive Officer Kevin Crutchfield said in a telephone interview. “I would characterize it perhaps as the second leg of a four-legged chair. We’re not done yet.”
  • Crutchfield’s strategy is to broaden Alpha’s operations and coal product base from the Central Appalachia region to other key U.S. basins, he said in an interview July 29. He was president before becoming CEO today with the takeover.
  • The deal also gives Alpha access to the least expensive U.S. reserves in Wyoming’s Powder River Basin. “A name like Foundation doesn’t come along all the time,” said Pearce Hammond, an analyst at Simmons & Co. in Houston. “You’ve got the opportunity to diversify. The Powder River Basin to me is like an annuity.”
  • Diversifying the company’s coal offering to include both thermal and metallurgical makes Alpha more attractive to investors, Hammond said.
  • “We not only can continue to consolidate in Central Appalachia, but now we have other regions to consider growth in,” Crutchfield said. “Wide open for us is the Illinois Basin. We can continue to grow in the Powder River Basin. The Rockies region is open and available for growth for us.”
  • The company this week said its second-quarter profit plunged 77 percent to $15.4 million from a year ago. Alpha’s production costs averaged $62.05 a ton. That compares with Foundation’s second-quarter profit of $30.7 million from a loss of $4.4 million, last year. The company’s production costs averaged $17.04 a ton. Alpha’s costs are higher because mines in Central Appalachia are deep underground and require more earth removal and disposal, and the activity is subject to more safety regulations.
  • The two largest U.S. producers, St. Louis-based Peabody Energy Corp. and Arch Coal Inc., shed most of their Eastern mines to focus on the lower-cost surface mines in the West.
  • “There will be opportunities as a result of this recession that we’re going through and it’s not going to be too long from now,” Crutchfield said. “The opportunities will start to present themselves later this year and that will continue all the way through maybe sometime in 2011.”
No positions

And like sands through the hourglass so are the Days of Our Coal....

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