Arch to Acquire International Coal for $3.4 Billion for Steelmaking Assets

Arch Coal Inc. (ACI)’s $3.4 billion acquisition of International Coal Group Inc. (ICO) will make it the second-largest U.S. coking-coal producer at a time when prices are soaring amid demand from China and India.

Benchmark prices for metallurgical coal have risen 47 percent to a record $330 a metric ton for the three months starting April 1, boosted by consumption from Asia as Australia, the world’s largest producer, recovers from torrential rains and flooding.

The sale gives Arch assets in every major domestic coal basin and will increase its reserves 25 percent to 5.5 billion tons, the company said. International Coal, known as ICG, was put together by investor Wilbur Ross, who is chairman, holds 6 percent of the shares and brought it public in 2005. Arch will be second in steelmaking coal after Alpha National Resources Inc., which is acquiring Massey Energy Co.

“You have seen a lot of consolidation in North America in the past six months most of it being coke- and coal-driven,” Curtis Woodworth, a metals and mining analyst with Macquarie Capital USA Inc, in New York said. “Everyone wants to have exposure to that. The only way you can really do that is if you have scale.”

Arch fell 77 cents, or 2.2 percent, to $33.53 on the New York Stock Exchange. International Coal, based in Scott Depot, West Virginia, climbed $3.40, or 31 percent, to $14.43. It has more than doubled in the last year.

ICG’s Coal

About 30 percent of International’s 1.1 billion tons of reserves are steelmaking coal, Arch said in a statement today. The combined company will have total reserve of 5.5 million tons, Arch said.

Steel consumption is expected to grow about 60 percent over the next decade, driving demand for metallurgical coal, particularly in Asia, according to an Arch slide presentation cited by executives.

“It’s a multitiered argument,” said Brian Gamble, an analyst at Simmons & Co. Intl in Houston. “What’s the Chinese economy look like? How much steel are they going to produce and how much coal are they going to need? How does India look? How much will Japan need to rebuild?”

Arch will acquire International’s 13 active mining complexes, along with one major mining complex under development, across three coal basins. The company’s mines are in Illinois, Kentucky, West Virginia, Maryland and Virginia.

Takeover Synergies

The company expects the takeover will produce annual savings of $70 million to $80 million because of increasing operating, marketing and administrative efficiency, and that it will add to earnings beginning next year.

Arch Chief Executive Officer Steven Leer, 58, said the company’s acquisition strategy was to buy while prices were low, and it didn’t deviate from that even as it agreed to pay a 32 percent premium to International’s closing share price of $11.03 on April 29.

“The low-point here wasn’t the pricing market, it was the production market of where ICG is in their development cycle of their reserves,” Leer said in a telephone interview. “They’re right at the cusp of a significant expansion in met coal production capability.”

Ross, 73, held an initial public offering for International Coal in December 2005, offering stock at $11 a share. They traded as low as $1.11 on March 9, 2009.

In an interview with Bloomberg Television, Ross said that it “was time to harvest” his investment.

International plans to start output at its Tygart Valley No. 1 operation in West Virginia in 2014, with capacity to produce 3.5 million tons of coal per year, Arch said.

Arch will be competing against Alpha Natural Resources, Consol Energy Inc. and Walter Energy Co., Gamble said.

Walter last month completed its C$3.3 billion ($3.3 billion) acquisition of Western Coal Corp. to boost its reserves and production of metallurgical coal.

“This does put Arch into the discussion, whereas before they weren’t,” Gamble said.

To contact the reporters on this story: Mario Parker in Chicago at mparker22@bloomberg.net; Aaron Clark in New York at aclark27@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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