Met-Coal Mash Up

Given all the rumors and discussions about the bid, the actual announcement that Walter Energy (NYSE:WLT) is buying Canada's Western Coal for C$11.50 a share is perhaps something of an anticlimax. That notwithstanding, this deal will create the largest metallurgical coal pure-play and the third-largest met coal producer overall.

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The Deal
Under the terms of the deal announced Friday, Walter will offer Western Coal shareholders their choice of C$11.50 in cash or 0.114 shares of Walter Energy, or a combination thereof up to a limit of 70% total cash in the deal. That represents a total deal value of about $3.3 billion and a 56% premium on Western Coal shares before this chatter began.


The New Company
As Walter Energy boasted in its press release on the deal, this combination will create the largest pure-play met coal producer in the world, with some 385 million tons of reserves. Met coal is used primarily in smelting iron and steelmaking, where the higher carbon content (and lower moisture) of this type of coal is necessary. That is different than thermal coal - the coal used to power electrical utilities, and the bulk of the coal produced and sold by companies like Peabody Energy (NYSE:BTU) and Arch Coal (NYSE:ACI). (For more, see Metallurgical Coal Update.)

Western presently has eight mines in the U.S., Canada, and the U.K., with proven and probable reserves of nearly 209 million tons. The U.S. mines are in Central Appalachia (an area that has received some not-so-positive attention for the coal industry recently), and represent about 30% of total production, while the Canadian assets are all in northeast British Colombia.

By comparison, Walter's mines are in Alabama, where the company holds about 140 million tons of reserves. Note that the stated amounts of reserves do not equal the number listed for the proposed merged company - that is likely a byproduct of conversion from metric tonnes to short tons, as well perhaps as anticipated incremental reserve adds since the latest fiscal year-end reports.

A Hot Place To Be
Walter is certainly not the only company interested in expanding its coal holdings these days. Rio Tinto (NYSE:RIO) and Chalco (NYSE:ACH) just announced a joint venture that will focus on uncovering more mineral reserves in China (including met coal), and Massey Energy (NYSE:MEE) may be on the block (with Alpha Natural Resources (NYSE:ANR) likely an interested party. Moreover, looking a little further afield, there is the relatively recent announcement that Vallar is buying significant stakes in Indonesia's Bumi Resources and Berau Coal Energy for a total of $3 billion.

A Volatile But Lucrative Market
Although steelmakers like POSCO (NYSE:PKX) and ArcelorMittal (NYSE:MT) are not necessarily the most popular stocks right now, there is a generally accepted notion that ongoing global economic growth will lead to more demand for steel, which should in turn push up the price of met coal. In fact, some steel companies have looked to take a bit more control of their margins by buying coal assets (Mittal foremost among them). None of that means that met coal will see a steady or consistent upward march in price, but it seems probable that prices will continue to rise over time as industrialization in the developing world expands.

Bottom Line
As demand for met coal producers is on the upswing, it is probably only a matter of time before more met coal stocks come to market - whether as limited partnerships or regular operating companies. Investors interested in this long commodity cycle should certainly investigate the newcomers, as well as established players like BHP Billiton (NYSE:BHP) and Teck Resources (NYSE:TCK) and the small junior miners. Remember, though, that these stocks almost always give investors a second chance to buy, so chasing coal stocks at their 52-week highs may not be the best move for those who do not play the momentum game. (For more, see Coal Burns Bright Despite Pressures.)

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