Massey announced late Tuesday it had signed a definitive agreement to buy Cumberland and its affiliated companies in a cash and stock deal.
Cumberland is one of the largest privately held coal producers in the United States with 2009 coal revenue of $550 million generated from the production and sale of 7.8 million tons of high-quality central Appalachian coal.
Massey will acquire Cumberland free of debt.
Based in Abingdon, Virginia, Cumberland operates primarily underground coal mines in southwestern Virginia and eastern Kentucky.
Its assets include an estimated 416Mt of contiguous coal reserves, a preparation plant in Kentucky served by the CSX railroad, and a preparation plant in Virginia served by the Norfolk Southern railroad.
Of the estimated reserves, Massey said more than half had metallurgical coal qualities.
Cumberland's existing operations produce both steam and metallurgical-quality coals.
About 4.8Mt of its annual production is of metallurgical quality, of which 800,000t are currently being sold into the metallurgical coal market.
Massey expects to be able to produce 5Mt of met-quality coal annually with the existing Cumberland assets without spending additional development capital.
"The Cumberland assets and operations will be highly complementary to our existing base and fit well with our strategy in central Appalachia,” Massey chief executive Don Blankenship said.
“Cumberland's track record of low-cost production, their focus on underground mining and their low legacy liabilities are consistent with Massey's history and strategy.
“We believe this acquisition is an excellent fit for Massey. Our analysis shows it will be accretive to earnings per share beginning this year and we believe it will add significant shareholder value."
Massey believes it will achieve operating synergies when the transaction and the integration of the Cumberland operations are complete.
These synergies are expected to result from increased global marketing of met-quality coal through Massey's established sales network, sharing of operational best practices, purchasing synergies and working capital optimisation.
Cumberland generated earnings before interest, taxes, depreciation and amortization of $115 million in 2009 and, as at the end of last year, held 8.1Mt of coal committed and priced for sale in 2010, primarily with thermal coal customers.
Massey expects to be able to use coal produced from the acquired operations to increase met coal sales by up to 5Mtpa over the next couple of years.
On a pro forma basis, after adding the Cumberland reserves, Massey will have an estimated total reserve base of 2.9 billion tons. An estimated 1.3Bt of Massey's total coal reserves are of metallurgical quality.
"Richard Gilliam, chairman and CEO of Cumberland, and his team have done an excellent job in building a great company,” Massey president Baxter F Phillips, Jr said.
“They have a tremendous workforce of over 1000 talented and experienced miners and support staff that we will be proud to count among our Massey members.”
Under the deal, Massey will pay $640 million in cash and $320 million in shares of its common stock, calculated based on its average closing price for the 20 trading days ending on the day before the closing of the acquisition, subject to adjustment for working capital.
The acquisition is expected to close in the second quarter of 2010.
Both Massey’s and Cumberland’s boards have approved the transaction.
Massey said although it had only preliminary data on projected first-quarter results, operating results for the first two months of 2010 were below its internal operating forecast and it expected first-quarter 2010 results to be below forecasted operating results.
The company said the shortfall to the operating plan in the first two months was largely the result of continuing weather-related disruptions of coal production and shipments.
