Why Alpha Natural Resources’ Massey Energy acquisition got messy
Alpha Natural Resources in 2010
Alpha Natural Resources (ANR) sold 84.8 million tons of coal in 2010 (including 11.9 million tons of met coal) at an average price of $41.2, generating revenues of $3.9 billion. Its average cost of sales per ton was $30.1, helping the company record margins of over $11 per ton. Net income came in at $95.6 million, while free cash flows came in at $384.7 million.
Alpha Natural Resources’ balance sheet looked sound, with cash and cash equivalents of $554.8 million against total debt of $753 million. This led to net debt of just under $200 million.
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Massey Energy acquisition
In June 2011, Alpha Natural Resources (ANR) completed its $7.1 billion acquisition of Massey Energy. Massey Energy was a large Appalachian coal producer with reserves of around 2.4 billion tons. The acquisition helped ANR be the second-biggest US coal producer (KOL), behind Peabody Energy (BTU) and ahead of Arch Coal (ACI) and Cloud Peak Energy (BTU).
The acquisition helped ANR consolidate its position as the largest US met coal producer. It helped the company increase its revenues by 81% to $7.1 billion in 2011. The deal was mostly financed by Alpha Natural Resources’ shares, and the cash outlay was just $1 billion. However, ANR also took responsibility of Massey Energy’s debt, resulting in ANR’s debt increasing to $3 billion (net debt of $2.4 billion) as of December 31, 2011.
Coal prices started plummeting and the company started burning free cash in 2Q 2012. It continues to burn cash. The company had recorded a large goodwill, as it paid more than market value for Massey, expecting future benefits. With the fall in coal prices, the company recorded $1.7 billion goodwill impairment charges in 2012.
ANR was forced to close mines in Appalachia, including some mines from its Massey acquisition. The company had to borrow more to ensure enough liquidity to survive the downturn. At the end of 3Q 2014, the company had debt of $3.9 billion (net debt of $3 billion) even after selling lucrative assets like its stake in Rice Energy.
In the next part of this series, we’ll see how Arch Coal’s acquisition played out.