January 31, 2011
– Comments (6)
This would be incredibly sad if it wasn't true...
Here's my write-up of the Massey deal:
Alpha Nabs Massey in a Massive Coal Deal
If you were to take two of the fastest-growing names in one of the world's most acutely undersupplied raw materials, and squeeze them together with all the fundamental strength of a long-term "global supercycle" of expanding demand, you would create a diamond.
This deal alters the coal miners' playing field in fascinating ways. Even the king of coal -- Peabody Energy (NYSE: BTU) -- sits suddenly less comfortably upon its throne. Peabody generated nearly $6.9 billion in revenue for 2010, which happens to mirror the precise estimate of pro forma 2010 revenue for the combined Alpha and Massey operations. The royal's market heft will exceed that of pro forma Alpha by only about 20%, leaving principally their disparate product mixes and geographical profiles as key distinguishing features between the two.
Even for a met-heavy miner like Alpha, steam coal remains the bread-and-butter, while the higher per-ton margins available in met coal production are like pasta dinner that gives you something to dip your bread into. Through the first nine months of 2010, for example, Alpha derived fully 61.5% of its sales from coals bound for the thermal market. The Massey acquisition will tip the product-mix needle meaningfully in the direction of met coal -- particularly when we factor-in Massey's targeted doubling of met coal production capacity to 20 million tons by 2015 -- but tracking long-term trends in thermal coal pricing and supply must remain a key aspect of a Fool's due diligence even after this move toward met.
Nearly one full year has passed since I urged Fools to prepare for a meaningful surge in met coal prices and the shares of companies that mine the stuff. In the interim, each of the producers discussed therein has at least doubled the impressive price performance of the S&P 500.
Long after the Australian floods have receded, and that nation's critical output is restored, I maintain that the persistent drivers of a dramatic bull market for metallurgical coal will persist ... much to the benefit of Fools who approach the sector with an appropriately long-term perspective. Peabody recently reiterated its bullish five-year forecast for 30% growth in worldwide steel consumption over the next five years ... requiring an incredible 300 million tons of additional annual met coal production. Even if only a fraction of forecasted demand were to materialize, I believe this is one commodity that will remain in very short supply for many years to come. I intend to hold my position in Peabody Energy for the long haul, and soon I may just have to make some room beside it for the newest $15 billion behemoth of the coal world: Alpha Natural Resources.
Rock on Sinchy!