Massey Energy Lights Up a $960 Million Deal for Cumberland Resources


A year ago, Massey Energy's (MEE) shares were trading at a lowly $10.

But since then, its shares have seen a powerful rally, and the stock price is now at $51.74.

To capitalize on the big run, Massey is revving up its deal machine. This week, the company agreed to pay $960 million for Cumberland Resources. With no assumption of debt, the transaction consists of $640 million in cash and the rest in stock.

A Look at Cumberland

Founded in the mid 1980s, Cumberland is now one of the largest privately-held coal producers in the U.S., with mostly underground mines in southwestern Virginia and eastern Kentucky. It controls an estimated 416 million tons of contiguous coal reserves as well as two major preparation plants that connect to the CSX and Norfolk Southern railroads.

Last year, Cumberland posted $550 million in revenues and produced roughly 7.8 million tons of coal. EBITDA was $115 million, despite a tough economy.

Cumberland has been profitable every year since inception and has a strong safety record, which is critical as the regulatory environment gets tougher. The company has the advantage of a low-cost source of coal and has built a highly-efficient operation. And combined with Massey, there should be further opportunities to reduce costs because of duplications and economies of scale. The deal is expected to be accretive to earnings within the first year.

Building for the Future

At 8.3 times 2009 EBITDA, Massey's deal for Cumberland is not cheap. But in the energy business, depletion is a big problem -- and this means buying up reserves. All in all, Massey has proven to be quite skillful at this. With the Cumberland deal, Massey will have an estimated total reserve base of 2.9 billion tons of coal.

The company should also be able to boost revenue yield because of its global footprint. After all, emerging-market economies have a heavy appetite for steel, which means more coal demand. China accounts for nearly half of all steel production in the world, and India is likely to ramp up purchases as it needs to build its infrastructure.

Yet, on a short-term basis, Massey will need to deal with some headwinds. First-quarter earnings are forecasted below the internal projection because of weather disruptions.

But this seems to be of little concern to investors. In today's trading, Massey's shares are up 3%.