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M&A strategic move to lower costs, improve credit for new larger company

By Steve Hooks

Alpha Natural Resources' planned purchase of Foundation Coal Holdings is another instance of coal companies seeking to cut costs, improve price positions and strengthen creditworthiness through combinations, coal veterans attending the Southern States Energy Board presentations in May told Platts.

"The problem in the last few years, especially in the East and Central Appalachia, is that regulation is increasing costs, almost on a daily basis," said John Snider, vice president of external affairs at Arch Coal. "Even with unprecedented [price] levels, we have companies going out of business" in Central App, another attendee said.

The meeting in Kingsport, Tennessee, was SSEB's Committee on Clean Coal and Energy Technologies Collaboration, in conjunction with the Eastern Coal Council.

Arch is awaiting federal regulatory approval to acquire Rio Tinto Energy America's Jacobs Ranch surface mine in Campbell County, Wyoming. That operation, which shipped 42.1 million st of coal in 2008 and is adjacent to Arch's Black Thunder surface mine, is RTEA's biggest coal mine.

Snider said Arch should hear from federal regulators in a couple of weeks, but he didn't see a problem. Likewise, he didn't see a regulatory problem with the Alpha-Foundation combination.

See a related map of Combined eastern Alpha, Foundation mines

Listen to a related podcast with Platts editors on the trend of consolidation in coal companies picking up in 2009.

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But, commenting in general about the spate of regulations and other policy coming out of Washington that affect the coal industry, "It's almost every five minutes that something changes."

A coal company merger is all about reducing marketing and administrative costs -- it's all about reducing costs, period -- he said. FBR Capital Markets said in a May 13 advisory that the new corporate combination should result in $70 million/year in savings on selling, general and administrative expenses.

Meanwhile, a utility fuels buyer said that a combination such as the Alpha-Foundation deal means that the bigger company has a shot at better credit and investment ratings.

From his standpoint as a fuels buyer, he said, a better credit rating for a coal supplier means a lot.

Created: June 4, 2009

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