Alpha-Foundation Coal Merger Revives $1 Billion in Coal Projects

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Researched by Industrial Info Resources (Sugar Land, Texas)--In the midst of a global recession, two large coal producers have joined forces, resulting in the creation of the third-largest coal company in the United States, possibly weathering industry uncertainty and bringing back to life almost $1 billion in capital projects expected to come to fruition over the next five years.

The $1.4 billion merger between Alpha Natural Resources (NYSE:ANR) (Alpha) (Abingdon, Virginia) and Foundation Coal Holdings Incorporated closed July 31, 2009, and the two were officially integrated as one company in the fourth quarter. The newly formed company, which will retain the name Alpha Natural Resources, is the nation's No. 1 metallurgical coal supplier, with control of more than 2.3 billion tons of coal. Alpha, along with its subsidiaries, now operates 61 coal mines and 14 preparation plants in Northern and Central Appalachia, as well as the Powder River Basin.

Industrial Info Resources (IIR) is currently tracking nine of Alpha's capital and maintenance projects, both on-hold and active, with a combined total investment value of approximately $1 billion. Many of these projects were placed on hold while the details of the merger were being finalized. As market conditions warrant, Alpha is re-evaluating a few of its planned large-scale projects that were once on Foundation Coal's drawing board.

The first project to come to fruition will be the $300 million Freeport Coal Mine and preparation plant, which will be about 10 miles northeast of Waynesburg on Freeport Road. The underground room and pillar coal mine will produce 3 million tons per year of metallurgical and steam coal. Alpha plans on selecting an engineering, procurement and construction contractor by mid-2010 and securing permits by the end of 2010. IIR has been tracking this project since June 2008.

Alpha executives stress that the Freeport mine remains a priority not only because it will produce both metallurgical and steam coal, but because it is strategically located near potential customers with great access to low-cost transportation.

The company also is in the process of acquiring an air permit for a coal transfer terminal in Luzerne Township, Fayette County, Pennsylvania. The recently purchased Labelle Dock will be refurbished by Alpha to create a 500,000-ton-per-year coal terminal consisting of stockpiles; barge loading/unloading equipment; conveyors with water sprays at transfer points; railways; and roadways. Details, a timeline and the total investment value for the project are still up in the air, but company officials say it will be considerably smaller than the Freeport project, at less than $20 million.

One of Alpha's largest coal projects on the horizon, with an initial capital investment of $400 million to $500 million, is Foundation Coal Mine in Waynesburg, Pennsylvania. The mine will extend Emerald Coal Mine's Pittsburg No. 8 coal seam production in Northern Appalachia after the mine is exhausted in 2018. IIR has been tracking this project since June 2007.

The underground mine and preparation plant will be built in phases. Phase I will include the construction of a 7 million- to 8 million-ton-per-year longwall mine and preparation. Phase II will ramp up production to 14 million tons of coal per year, and Phase III will dip into the Sewickley coal seam, expanding production to 21 million tons of coal per year. Once completed, Foundation Coal Mine will be the largest coal mine in the United States. Alpha hopes to obtain permits by the end of 2011 and begin construction by 2012-13.

Alpha is currently permitting two smaller room and pillar underground coal mines in West Virginia: Sumter Coal Mine in Webster Springs, and Jackson Bridge Coal Mine in Little Birch. These two mines will cost about $10 million to develop and will produce approximately 300,000 tons of coal per year for transport to the Brooks Run Coal Preparation Plant in Cowen, West Virginia. IIR has been tracking these projects since July 2009.

Also on the drawing board, but much further down the road, is the $120 million Harts Creek project, which is 6 miles south of Harts, West Virginia. The Harts Creek complex will produce 2 million to 3 million tons of coal per year from Hover Fork 1 and Hover Fork 2 coal mines. Alpha expects to have two of its U.S. Environmental Protection Agency Air Permits by the end of 2010, but it will be five or more years before construction starts.

The revival of these projects shows that the market for metallurgical coal is slowly strengthening around the world. In what many industry analysts believe to be the tail end of a global recession, Alpha Natural Resources is proceeding cautiously.

"We will continue to pursue a pragmatic and restrained approach to production in the current market environment, in which decreased coal-fired generation and high utility inventories have significantly reduced demand for thermal coal," said Alpha's Chief Executive Officer Kevin Crutchfield in the company's third-quarter 2009 earnings report. "However, in the last few months, interest in metallurgical coal appears to have picked up markedly, discussions with metallurgical coal customers have increased, and order flow is beginning to result from this heightened activity."

Alpha currently produces 90 million tons of steam and metallurgical coal per year.

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