Aug. 22 (Bloomberg) -- OAO Severstal, Russia's biggest steelmaker, agreed to buy PBS Coals for $1.3 billion to supply it U.S. operations with coking coal.

Cherepovets, Russia-based Severstal said it will buy a combination of PBS and Penfold Capital Acquisition Corp. for C$8.30 ($7.93) a share, Severstal said today in a statement.

Severstal, led by billionaire Alexei Mordashov, follows steelmakers including ArcelorMittal and Posco in acquiring coal mines after a year in which steel and coal have doubled to records. Demand for raw materials is surging as steelmakers boost production to satisfy greater usage in China and India.

``The acquisition of PBS will help ensure that Severstal controls its operating costs by providing a guaranteed supply of metallurgical coal,'' Gregory Mason, Severstal's chief operating officer and head of its international division, said in the statement.

PBS has an annual capacity of more than 4 million metric tons of coking coal and also produces thermal coal at its facilities in Somerset County, Pennsylvania. Severstal plans to complete the purchase in mid-October.

Severstal is expanding in the U.S. to take advantage of a weaker dollar, which has made the nation's steel exports more competitive. Mordashov, who took control of Severstal after being appointed as chief economist in 1988, said in a June 25 interview he's seeking iron-ore and coal assets in the U.S. to protect the company from surging prices for its main raw materials.

Steel Shortage

A steel shortage in the U.S. pushed prices to a record $1,052 a ton in June. Severstal spent $950 million this year on an ArcelorMittal plant near Baltimore and WCI Steel Inc., based in Ohio. The company also acquired steelmaker Esmark Inc. for about $672 million to sell a wider range of products.

The Russian steelmaker runs a mill in Dearborn, Michigan, that supplies Ford Motor Co., and the SeverCorr factory in Columbus, Mississippi. Severstal has invested in flat-rolled steel for the auto and appliance industries in North America and is considering products such as bar steel used in construction.

The transaction comes amid quickening consolidation in the U.S. coal industry. ArcelorMittal, the world's largest steelmaker, agreed to buy West Virginia-based Mid Vol Coal Group on June 23 to add more than 85 million tons of reserves. Cleveland Cliffs Inc. is also seeking to buy coal company Alpha Natural Resources Inc.

Expansion Plan

Mordashov, 42, said in the June 25 interview that he would allow his 82 percent stake in the company to be diluted by more than half, to as little as 40 percent, if stock is issued to fund purchases.

Severstal, the largest steelmaker in Russia and the fourth- largest in the U.S., plans to expand existing North American operations and may add new steel products.

Prices for metallurgical coal, which trades mostly in bilateral contracts, have more than doubled in the past year as transportation constraints in Australia and South Africa curbed supplies. Fording Canadian, the second-largest exporter of the coal, signed contracts in May for 90 percent of its 2008 production at $275 a ton, twice the average $97 a ton in 2007.

To contact the reporters on this story: Dale Crofts in Chicago at dcrofts@bloomberg.net; Maria Kolesnikova in Moscow at mkolesnikova@bloomberg.net.

Last Updated: August 22, 2008 07:00 EDT