Arch Coal Inc. said this week it will buy rival International Coal Group Inc. in a $3.4 billion cash deal designed to exploit growing demand for high-priced coal used to manufacture steel.
St. Louis-based Arch said the combined companies would be the nation’s second largest supplier of metallurgical coal, a key ingredient in steelmaking.
Arch had expected to sell 7.5 million tons of metallurgical coal this year, but said adding ICG should up that total to 11 million. Arch said it hopes to expand such coal production to more than 14 million tons annually over the next three years.
Met coal commands premium prices often two or three times charged for coal used to produce electricity. Government figures show exports grew to 55 million tons last year, from 42.5 million in 2008.
Companies have been placing multi-billion bets that demand for steel in China, India and other Asian countries will continue that growth. In November, Floridabased Walter Energy announced a $3.2 billion buyout of Western Coal Corp. In January, Virginiabased Alpha Natural Resources agreed to buy troubled Massey Energy Co. for $7.1 billion.
“I think it is a deal that takes two plus two and makes five, six or seven,” Arch Chief Executive Steven Leer said.
The acquisition, which amounts to $14.60 per share, has been approved by the boards of both companies. Shareholders that control 17 percent of International’s stock have agreed to the deal, which must still be approved by regulators. The transaction is expected to close by mid-year.
International Coal Group stock rose $3.43 to $14.46 at the opening of trading Wednesday (today). Arch Coal shares fell $ 2.16 to $32.14 by early morning May 4.
Arch said it plans to use primarily debt to finance the deal. Moody’s Investors Service said it was reviewing all of the company’s debt for possible downgrade. Moody’s says it is weighing an upgrade of ICG’s rating.
Arch said buying ICG will improve the quality of its metallurgical coal and give it the opportunity to blend various grades. The deal also holds the promise of a big production boost from ICG’s planned Tygart Valley No. 1 mine in Taylor County in northern West Virginia. The coal is expected to produce a small amount of coal late this year and 3.5 million tons a year at full capacity.
Two additional mines are planned for the area and Leer said Arch will start pursuing permits quickly. Combined, they have perhaps 125 million tons of metallurgical coal.
“We think there’s a tremendous intrinsic value in ICG, that they are right on the cusp of expanding their met coal production,” Leer said. “The ability to create significant value moving forward, the timing worked out very well.”
ICG put itself up for sale and Arch began looking more than a month ago, Lear said.
“You’ve seen some of the smaller and medium sized companies realize you need a breadth of scale,” he said. “I believe ICG had come to that same conclusion.”
Last week, Arch reported that it returned to a profit in the first quarter as higher coal prices offset a decline in sales. At the same time, the company also raised its 2011 earnings prediction on the expected jump in global demand for coal used both to make steel and produce electricity.
Arch operates 19 mines and controls approximately 3.9 billion tons of reserves in Appalachia, the West and Midwest.
Scott Depot-based ICG runs 13 mining complexes in Appalachia and Illinois.