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Merger Creates New Coal Giant

July 16, 2008

By George Hohmann, Charleston Daily Mail, W.Va.

Jul. 16–CHARLESTON, W.Va. — There’s a new coal mining giant in Appalachia.

Cleveland-Cliffs Inc., the largest producer of iron ore pellets in North America and a major supplier of metallurgical coal, announced it is buying coal producer Alpha Natural Resources in a deal valued at $10 billion.

Cleveland-Cliffs is headquartered in Cleveland, Ohio. The company operates six iron ore mines in Michigan, Minnesota and Eastern Canada, and three coking coal mines — the Pinnacle and Green Ridge mines in Pineville, Wyoming County, and the Oak Grove Mine in Adger, Ala.

Alpha Natural Resources is headquartered in Abingdon, Va. The company was formed in 2002 from the coal assets of Pittston Coal Co. In 2003 the company acquired Coastal Coal Co., American Metals and Coal International, and Mears Enterprises Inc. In 2005 Alpha acquired numerous mines, reserves and operations in West Virginia and Virginia from the Nicewonder coal group. Last month Alpha acquired Arch Coal Inc.’s Mingo Logan-Ben Creek coal mining assets in West Virginia.

Alpha has 33 active underground mines, 24 active surface mines and 11 coal preparation plants in Virginia, West Virginia, Kentucky and Pennsylvania. Alpha’s West Virginia properties are operated as the Whitetail business unit near Kingwood, Preston County; the Brooks Run North unit near Erbacon, Webster County; the Brooks Run South unit at Kepler and Litwar, and the Callaway business unit at Black Bear.

Cleveland-Cliffs and Alpha said in a joint statement that the combined company will be renamed Cliffs Natural Resources. It will have nine iron ore facilities and more than 60 coal mines in north and South America and Australia.

Cliffs Natural Resources will have estimated 2008 annual revenue of nearly $6.5 billion and annual sales volume in excess of 30 million tons of iron ore, nearly 18 million tons of metallurgical coal and will ship about 17 million tons of steam coal.

The deal puts the combined company in the Appalachian coal production big league with the likes of Consol Energy and Massey Energy.

Coal companies are flush with cash from record-high prices. Bill Raney, president of the West Virginia Coal Association said today, “When you look at the overall economy and what’s going on in the energy field, it’s absolutely unbelievable. The Appalachian region is somewhat the antithesis of the remainder of the country.”

Today’s deal could signal a new round of mergers in the industry, which remains fragmented. In April St. Louis-based Patriot Coal agreed to acquire Charleston-based Magnum Coal in a $709 million deal.

Raney said it’s particularly interesting that steel companies appear to have a renewed interested in owning coal mining companies. He noted that steel giant ArcelorMittal has expressed interest in coal mines in Australia and Russia and JSW Steel of India wants to acquire United Coal Co.

“Those who have observed the industry over the last three decades may recall the heavy presence of U.S. Steel and Bethlehem Steel in the coal-mining business — and their subsequent exit,” Raney said. “Now, the worldwide demand for steel and metallurgical coal has prompted what is seemingly a history-repeating series of activities, with the steel companies once again entering the coal extraction business.”

Cleveland-Cliffs and Alpha said their combination is expected to result in savings of at least $200 million beginning in 2010, mostly from enhanced coal processing and blending efficiencies and the elimination of duplicative administrative expenses.

Cliffs Natural Resources will be headquartered in Cleveland. The company will have two operating divisions — iron ore, headed by Donald Gallagher, operated from Cleveland and coal, headed by Kevin Crutchfield, operated from Abingdon.

Joseph Carrabba, Cleveland-Cliff’s chairman, president and chief executive officer, said in a prepared statement, “Today’s announcement represents a significant milestone for both companies. Cliffs Natural Resources will be positioned as a diversified natural resources company with significant holdings in a variety of important minerals. By combining our companies’ complementary operations and management capabilities, we will be well positioned to meet the world’s increasing demand for raw materials.

“Since its inception in 2002, Alpha has been highly respected for its industry leading expertise around both the operation and acquisition/integration of coal properties, and we are confident our two management teams and more than 8,900 employees will achieve great things together,” Carrabba said.

Michael Quillen, Alpha’s chairman and chief executive officer, said in a prepared statement, “Together, Alpha and Cleveland-Cliffs will have the size, the management depth and the mining expertise to compete on the global stage as demand for raw materials continues to increase around the world.

“This transaction is financially compelling for Alpha’s stockholders, who will benefit from enhanced value today alongside growth opportunities in the future,” Quillen said.

The agreement calls for Alpha stockholders to receive 0.95 shares of Cleveland-Cliffs common shares and $22.23 in cash for each share of Alpha common stock. Based on Cleveland-Cliff’s closing price Tuesday, Alpha stockholders would receive the equivalent of $128.12 per share — a premium of 35 percent over Alpha’s closing stock price Tuesday.

The transaction is expected to close by the end of this year. When that happens, Cleveland-Cliffs shareholders will own about 60 percent of the company and Alpha shareholders will own about 40 percent.

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Copyright (c) 2008, Charleston Daily Mail, W.Va.

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