Wednesday, March 17, 2010

Massey Energy (MEE) Seeks to Double Metallurgical Coal Sales with Purchase of Cumberland Resources

As much as I am a long term bull on these coal names (and have been since 2007), the moves of late remind me of when companies announced a stock split or a new website launch in 1999 and speculators ran into the stock, driving it up 15% overnight.  Right now people are frothing at the mouth for anything coal - specifically metallurgical coal related (which is the type of coal that goes into steel).   [Mar 8, 2010: BHP Billiton Pushes Through 55% Price Increase in Coaking Coal Prices, Quarterly Pricing - Iron Ore Also Potentially Set to Soar]  Massey Energy announced a purchase ($1B) deal Tuesday evening and the stock is flying today.
  • Coal producer Massey Energy Co. said Tuesday it has agreed to buy privately held rival Cumberland Resources Corp. for $960 million in cash and stock.  Richmond, Va.-based Massey called Cumberland a good fit for its strategy of capitalizing on growing Asian demand for higher-priced metallurgical coal. Approximately half of Abingdon, Va.-based Cumberland's 416 million tons of reserves in Virginia and Kentucky can be used as metallurgical coal, a key ingredient in making steel.
  • Massey recently announced its first shipment of 80,000 tons of metallurgical coal to China and expects to sell about 2 million tons of coal to India this year. Earlier this year, the company announced plans to invest $160 million this year in the first phase of a a mining complex capable of producing 2 million tons of metallurgical coal annually.
  • Terms of the deal call for Massey to pay $640 million in cash and $320 million in stock.
Obviously this is far more concrete than opening a new website, but the delirium associated around these announcement is striking.  Cumberland Resources apparently has enough met coal to double Massey's sales in that subsector, and in today's market that is enough to create great joy.

This is one of the sector's I had been looking to move into (along with iron ore) when I sold my Potash exposure, but I was waiting for this elusive pullback that just seems to never appear.  Chasing stocks has been the way to go in this now 5 week non stop rally.

  • Mine operator Massey Energy says this week's $960 million acquisition of Cumberland Resources will advance its goal of doubling sales of higher-priced coal used to make steel by 2012.  Massey, like other coal producers, has moved aggresively to capitalize on surging demand in Asia for metallurgical coal, with the U.S. and Europe still recovering from the recession.
  • Massey told analysts Wednesday the company is pushing for 20 million tons of metallurgical sales.  Virginia-based Massey plans to ship 10 million tons this year and says Cumberland should contribute 5 million more within two yearsCumberland shipped 800,000 tons of metallurgical coal last year.
So Massey thinks it can increase from 800K tons to 5 million in 2 years on the Cumberland assets?  I am not a mining expert, but wow - that seems aggressive.  Was Cumberland asleep at the wheel or some awful operators that they were not able to ramp up on their own?   But the reality of what actually happens in 2 years does not matter at this moment - if it is promised today, speculators salivating on their shirts want in.  If Massey can pull this off, it will position it along side Walter Energy (WLT) as one of the favorite's for the met coal crowd.

I'm actually fascinating by this sector's movements, considering China - who is the main country sucking up the world's commodities while the rest of the largest developed economies suck wind - is making noises about slowing down its economy.  Quite a dichotomy but it does fit in the thesis of those who believe the world economy will be back to (near) normal by 2011.

No position

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