Alpha Natural Resources: Will Synergies Justify the Massey Acquisition?

When Alpha Natural Resources (NYSE:ANR) acquired Massey Energy in 2011, it was deemed that it paid too much for a broken company, but this notion can be proved wrong if Alpha is able to realize the planned synergies from this acquisition. Alpha Natural Resources operates in the production, purchase, sale/resale of Industrial and Metallurgical coal and also provides freight and handling services to its coal customers. Alpha competes with other coal producers like Arch Coal (NYSE:ACI), Peabody Energy (NYSE:BTU) and CONSOL Energy (NYSE:CNX).

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The coal industry has been facing several challenges lately due to concerns about global economic growth impacting the steel market and stiff competition from cheaper and environment friendly natural gas. This has significantly affected the metallurgical coal requirements. In this situation it is important to be able to control things and Alpha which became 3rd largest coking coal producer globally after Massey acquisition can start to enjoy economies of scale.

At the completion of the acquisition, Alpha estimated the synergies to be approximately $ 200 million. Synergies are benefits anticipated from an acquisition. Some examples of synergies are exposure to newer markets for parent company’s products through acquisition and reduction in operating costs. Alpha is on track to achieve synergy target of $220 million to $260 million annually by mid-2013 resulting from shrinking operating expenses. This will be very critical in the environment of falling coal volumes because this may result in improvement in margins and the impact of lesser revenues may get slightly offset.

Moreover, Alpha got some very high quality coking coal mines in Central Appalachia through Massey. Alpha is also planning to commission Marianna and Rowland mines by 2013 which are low ash and low sulfur reserves and hence will save processing cost and improve margins.

We are in the process of revising our $32.68 price estimate for Alpha Natural’s stock, which is roughly 80% above the current market price.