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New York • Russian steelmaker Severstal got $60 million when it sold PBS Coals in July, less than a tenth of what it paid for the Appalachia mining company six years ago.
The worst U.S. coal market in decades is driving Severstal and other big mine owners for the exit, and a new class of buyers has emerged. The acquirers are smaller, backed by family fortunes, hedge-fund money and private equity companies. They're betting they can find value during the slump.
"In any sort of cyclical industry, you want to buy when there's blood in the street," said George Dethlefsen, chief executive officer of Corsa Coal Corp., the Canadian mining company that's backed by private equity investors, which bought PBS.
There have been 19 North American coal-mining deals this year, according to data compiled by Bloomberg, despite a steep downturn in prices and profitability. That's on track to match the 22 transactions last year when prices for the fuel were higher.
The price of thermal coal, used to generate electricity, has declined 9.4 percent in Central Appalachia this year, dragged down by boom in cheap natural gas produced by fracking and tighter controls on carbon emissions from coal-fired power plants. A global surplus and slowing demand in China as driven prices down for metallurgical coal used by steelmakers to a six- year low.
There may be more pain ahead. Domestic thermal coal demand may fall as much as 8 percent after U.S. emissions regulations for power plants take effect in April, Curt Woodworth, an analyst at Nomura Holdings in New York, said in a phone interview. More than 55 percent of seaborne metallurgical coal output is unprofitable at $119 a metric ton, the benchmark contract price for the fourth quarter, according to analyst Andrew Cosgrove of Bloomberg Intelligence.
As the U.S. coal industry shrinks, there may be as few as two "really, really" large domestic producers left in the future, said Kevin Crutchfield, chairman and CEO of Bristol, Va.-based Alpha Natural Resources Inc.
Amid this gloomy backdrop, the U.S. market for coal mergers and acquisitions is "very active," said Ted O'Brien, CEO of Doyle Trading Consultants LLC in New York.
SunCoke Energy Inc. is looking to sell its coal-mining business and James River Coal Co. is liquidating assets in bankruptcy court. Arch Coal Inc., which sold off a Utah mining operation last year for $423 million and then its Hazard unit in Kentucky in March, said Sept. 4 it may sell more assets.
"It's not headline deals that make big splashes in the press," O'Brien said in a phone interview. "It's much smaller positioning taking place that's going to set up the U.S. coal industry for the next path forward."
Corsa, the new owner of PBS, expects global demand for steel demand to rise, spurring a rebound in metallurgical coal prices, Dethlefsen said. His Toronto-based company, 55 percent-owned by U.S. private-equity firm Quintana Capital Group LP, plans to buy and develop mines close to Pittsburgh and the Great Lakes, the U.S. steelmaking hub.
While coal-fired power plants are closing or switching to gas, thermal coal still produced 39 percent of U.S. electricity in July, more than any other source, according to the U.S. Energy Information Administration.
Even in Appalachia, the region most affected by recent mine cuts, there's still a future for the industry, said Larry Clark, CEO of coal producer JW Resources Inc.
"There's always going to be a base level of demand for Central Appalachian coal," he said in an interview. "We'll always be competitive to supply it at a cost that leaves room for an appropriate return on capital."
Clark, a former partner at New York hedge fund Harbinger Capital Partners, teamed up with private-equity firm Bayside Capital Inc. last year to buy an eastern Kentucky coal mining complex for $47.3 million. JW Resources, which he and Bayside control, picked up another coal mining company on the Kentucky-Tennessee border in March.
Mitch Potter is using a similar playbook. The son of a Kentucky coal entrepreneur, Potter has owned and operated coal companies for decades. He created Blackhawk Mining in 2010 to buy idled mines and his family is majority owner of the company through JMP Holdings LLC.
Blackhawk has doubled its coal mining capacity this year, after buying Arch's Hazard unit for $26.3 million in March. In August, it submitted the $52 million winning bid for three James River mines in Kentucky, West Virginia and Indiana.
"We have a lot of knowledge and experience and commitment to Central Appalachia," Blackhawk President Nick Glancy said.
Most of the current wave of deals are smaller compared with previous years. Total value this year is $717 million, data compiled by Bloomberg show. That's down from $5.06 billion in 2013, and far less than the $14.4 billion of deals announced in 2011, which included Alpha's $6.66 billion purchase of Massey Energy Co.
One exception in the past year was closely held Murray Energy Corp.'s December purchase of five coal mines and other assets in Northern Appalachia for $3.25 billion including debt. In that deal, the biggest in coal in the U.S. in three years, Murray bought mines from Consol Energy Inc., which is shifting its focus to natural gas.
The move doubled St. Clairsville, Ohio-based Murray's output and made it the country's fifth-biggest producer by volume. Chairman and CEO Robert E. Murray said at a Sept. 22 industry conference in Pittsburgh he expects to raise output at the former Consol mines to as much as 36 million tons this year, from about 28 million tons in 2013.
Despite his ambitions, he said there's "nothing on the horizon" to suggest demand and prices will recover, and he expects more U.S. competitors to follow James River into bankruptcy.
That kind of pressure mean more opportunities may arise for buyers of U.S. coal assets. Dethlefsen, who's looking for additional Pennsylvania mines, said he's considering a number of potential deals.
"Given the depth of what I call the mining crisis we're currently in, the deal flow today — I've never seen it this strong," he said.