July 17 (Bloomberg) -- Cleveland-Cliffs Inc.'s $10 billion takeover of Alpha Natural Resources Inc., the biggest in the coal industry, may unleash a wave of acquisitions in a business where it's proving cheaper to buy than to build.

Peabody Energy Corp.'s deposits of 9.3 billion tons, the world's largest, are worth at least $146 billion at today's market prices, while the St. Louis-based company's stock is valued at $19.6 billion on the New York Stock Exchange. Massey Energy Co.'s reserves total about $240 billion, compared with the $6.25 billion valuation of its shares.

While the worldwide bear market slowed mergers and acquisitions by 35 percent in the first half of the year, takeovers of energy and mining companies jumped 33 percent so far this year as prices of coal and oil rose to record highs. The top eight U.S. coal producers, worth more than $50 billion, are still up for grabs.

``In the next 12 months there will be an unprecedented amount of both domestic and cross-border mergers and acquisitions,'' said Wilbur Ross, chairman of International Coal Group Inc. in Scott Depot, West Virginia, and a board member at ArcelorMittal, the world's biggest steel company. ``U.S. reserves are undervalued relative to those in the rest of the world.''

International Coal's 958 million tons of reserves are worth about $11.5 billion, compared with the $1.7 billion value of its shares.

Massey fell $7.69, or 9.9 percent, to $69.93 amid a broad decline in energy and commodity companies in New York Stock Exchange composite trading. Peabody dropped $6.49, or 9 percent, to $65.69 and International Coal dipped 79 cents, or 7.2 percent, to $10.19.

Prices Double

Coal prices more than doubled this year to $119.50 a ton on the U.S. East Coast. Demand soared 33 percent worldwide in the past five years because coal is combined with iron to make steel and is used to produce 29 percent of the world's power, according to data compiled by BP Plc.

Cleveland-Cliffs, North America's biggest producer of iron ore, is buying Abingdon, Virginia-based Alpha for its 57 mines and 617 million tons to provide more raw materials to the steel industry. The purchase values Alpha's reserves at $16.19 a ton, 35 percent more than on July 15.

BHP Billiton Ltd., the world's largest mining company, said its joint venture with Mitsubishi Corp. agreed today to buy the New Saraji coal project from New Hope Corp. for about $2.4 billion. The project is next to BHP Billiton Mitsubishi Alliance's Saraji mine in Queensland's Bowen Basin.

The increasing need for power in emerging markets also puts a premium on coal. China, the world's fastest-growing economy, gets 80 percent of its electricity from the mineral. India uses coal to generate about half its energy.

United Coal

JSW Steel Ltd. in Mumbai said this week it may buy closely held United Coal Co. of Teays Valley, West Virginia, for $2 billion.

The 11 percent decline in the dollar index, which measures the U.S. currency against six of its biggest trading partners, also makes U.S. coal cheaper to foreign buyers. The euro reached a record $1.6038 to the dollar on July 15.

``The likelihood of overseas investors is growing stronger because of the weak dollar,'' Steven Leer, the chief executive officer of St. Louis-based Arch Coal Inc., said in an interview last month. Arch shares rose 33 percent this year. The company's reserves are worth at least $47 billion, compared with its stock value of $8.6 billion.

Massey Sale

Massey canceled plans to sell itself in June 2007 because of a lack of buyers. Its shares rose 182 percent since then and it's now looking to make acquisitions.

``Our stock price will allow us to do some transactions that we haven't been able to do in the past,'' Mike Bauersachs, Massey's vice president of planning, said on June 27. The company plans to buy mines or reserves near its existing operations in West Virginia and Virginia to spread costs and maintain growth, he said.

Coal company shares typically trade at a discount to the value of their reserves to reflect mining and transportation costs as well as the life of the mines.

American prices are cheap relative to the rest of the world. Beijing-based China Shenhua Energy Co., Asia's biggest coal company, is valued at $15.52 per ton in Hong Kong trading, compared with $2.11 a ton for Peabody and $1.76 at International Coal.

Rising diesel, steel, labor and regulatory costs are encouraging companies to sell.

Higher Costs

Consol Energy Inc., the third-largest U.S. producer, reported a 25 percent increase in its average extraction cost to $28.32 per ton for the first quarter. Net income fell 34 percent to $75.1 million. The company has a market value of $16.6 billion.

``Not all coal companies are getting windfall profits from higher prices,'' said Jeff Watkins, an industry analyst at Hill & Associates. ``Their costs have increased dramatically.''

``It's clear that steel companies are willing to pay a premium to secure supplies of met coal,'' Jeremy Sussman, an analyst Natixis Bleichroeder in New York, said today in an interview.

Foundation Coal Holdings Inc., based in Linthicum Heights, Maryland, James River Coal Co. of Richmond, Virginia, and Walter Industries Inc. of Tampa, Florida, are likely targets of steelmakers and larger mining rivals, Sussman said. Each is valued at less than $6 billion.

``After a long lull, and despite lofty asset values, it appears that 2008 may finally be the year that the white-hot wave of mining M&A finally spills over into coal,'' said John Hill, an analyst at Citi Investment Research in San Francisco.

Ross, the billionaire investor who helped consolidate the U.S. coal and steel industries, says this is the start of a round of mergers that will prove Cleveland-Cliffs prescient in its Alpha bid.

``People will look back on this as the first major U.S. event, not as overpriced,'' Ross said yesterday in an e-mail.

To contact the reporter on this story: Christopher Martin in New York at cmartin11@bloomberg.net.

Last Updated: July 17, 2008 17:35 EDT