Alpha Natural Resources and Massey Energy: A Metallurgical Coal Dynamo

Coal-related stocks remain one of my favorite groups for 2011. Not only do I like the industry’s fundamentals, but mergers and acquisitions activity also picked up in 2010 and should remain robust in 2011.

– Elliott Gue, Stocks on the Run

Every time a merger or acquisition (M&A) is announced in the stock market and the acquired company shoots up in price by a double-digit percentage, I kick myself for not having owned the stock beforehand. I’d be rich if only . . .!  Hindsight is 20-20, of course.  But sometimes, an observant investor can pick up on both big and little hints that suggest an M&A deal is right around the corner. 

Take, for example, the announcement over the weekend (Jan. 29^th) that Alpha Natural Resources (NYSE: ANR) will acquire Virginia neighbor Massey Energy (NYSE: MEE) in a friendly $8.5 billion deal (including assumption of debt). Massey shareholders will receive 1.025 Alpha shares plus $10 per share in cash. Based on Alpha’s Friday’s closing price of $57.88, the offer values Massey at $69.33 which is 21% higher than Massey’s closing price of $57.23 on Friday. The deal, which has already received the approval of both companies’ board of directors, still needs shareholder and regulatory approvals. Assuming such approvals are forthcoming, the expected time for the deal closing is mid-2011.

Metallurgical Coal is Very Profitable

The combination would create the largest U.S. producer of metallurgical coal and the second-largest U.S. coal company overall. Elliott Gue, co-editor of Stocks on the Run, describes metallurgical coal this way:

There are two major coal markets: thermal coal and metallurgical (coking) coal. Thermal coal is burned in power plants to produce electricity. This variety tends to have less energy content per ton and typically trades at a lower price. Metallurgical coal contains more energy and is used in blast furnaces to produce steel.

I’m no fan of Massey Energy because of it horrendous environmental and safety record, but former CEO Don Blankenship was to blame for most of these problems and he has thankfully left the company. The fact remains that Massey has the largest reserves of metallurgical coal in the entire country (1.3 billion tons), making it a very attractive target to the nation’s largest producer of metallurgical coal (Alpha). According to Stocks on the Run co-editor Yiannis Mostrous, “Chinese demand for met coal has soared, boosting the prices that producers earn.” In other words, the more met coal a company has to sell, the more profit it will make.

Such a combination makes so much sense from Alpha’s standpoint that it may come under investigation by antitrust regulators at the Federal Trade Commission. A concentration of so much metallurgical coal in the hands of a single company could reduce competition and cause higher coal prices.

Top Five Chances to Buy Massey Energy for Big Profits

Rumors that Massey may be in play started on October 18^th when news outlets reported that the company had hired investment banking firm UBS to advise it on “strategic options,” including the sale of the company. Anyone could have bought Massey stock at the stock market open the next trading day for $38.09. Based on the takeout price of $69.33, this trade would now be an 82% winner. Let’s say that despite the October 18^th news report you weren’t convinced that “strategic options” meant an acquisition, so you didn’t buy the stock.

Your next big chance occurred on November 5^th when news broke that Alpha had approached Massey about a friendly takeover. The opening price of Massey the next day was $46.65 and this trade would now be a 49% winner. It’s possible that despite this news, you knew that CEO Blankenship was dead-set against a takeover so you thought the offer would be rejected and you didn’t buy the stock yet again.

Next up, news on November 22^nd that Massey had retained investment bank Perella Weinberg Partners to coordinate a “formal review of strategic alternatives to enhance shareholder value.” The opening price of Massey the next day was $50 and this trade would now be a 39% winner. But you convince yourself that the lawyers required the review of Alpha’s offer so that Massey management couldn’t be accused of ignoring its fiduciary duties. Blankenship still has veto power so you once again don’t buy.

On December 3^rd, the company forces Blankenship to retire. The opening price of Massey the next trading day was $51.41 and this trade would now be a 35% winner.  With the main obstacle to a takeover now gone, virtually nobody could think the company wouldn’t be acquired, right? But then you think that the new CEO Baxter Phillips is a Blankenship protégé who probably also is against a takeover. No buy!

On December 7^th, the Wall Street Journal reports that Massey has amended CEO Phillips employment agreement by doubling the golden parachute he will receive if the company is acquired. All doubt is now gone. Massey will be acquired. The opening price of Massey the next trading day was $50.68 and this trade would now be a 37% winner. 

Pay Attention to Merger Rumors

The lesson to be learned: You don’t need insider information to score big winners in the stock market. Rather, you just need to pay attention to publicly-available information. Often you get several hints of what will happen. If you act right away on the hints, you can score a huge gain (e.g., 82%), but even if you hesitate and wait almost two months before acting, you can still make a big gain (e.g., 37%). All you need to do is pay attention and appreciate the value of news when it comes out.

Buy Stocks with Catalysts with Stocks on the Run!

Elliott Gue, co-editor of Stocks on the Run, looks for catalysts such as M&A rumors because they often signal future stock price appreciation. As he wrote in a recent advisor roundtable:

When researching growth-oriented companies I look for catalysts. There’s no point in buying or selling a stock that’s just going to trade sideways or follow the broader market in lockstep.

If you are looking for a short-term trading service that can spice up your investment returns with some quick winners in three to nine months’ time, Stocks on the Run is just what the doctor ordered.

Right now, Elliott Gue and co-editor Yiannis Mostrous are recommending six stocks primed to deliver double-digit gains quickly. The latest is a coal stock that the dynamic duo believes may be the next takeover target. To find out the name, give Stocks on the Run a try today!

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