Executives of the Richmond, Va.-based coal company said Wednesday metallurgical production could reach 20 million tons in 2012 from a projected 10 million to 12 million tons this year, potentially making it the largest U.S. producer of the coal used by steelmakers. About half of that growth would come from Massey's $960 million acquisition of privately held producer Cumberland announced Tuesday evening.

The deal and Massey's projected production growth is driven by ongoing strength in the global market for metallurgical coal as Asian steel demand--and coal imports--rebound. The strong outlook has helped spur coal-sector merger and acquisition activity in the Eastern U.S. recently. Two weeks ago, Indian conglomerate Essar Group announced plans to buy Trinity Coal for $600 million to gain direct access to metallurgical coal for its steelmaking unit.

Massey's projected growth comes as U.S. producers continue to take the once rare step of shipping coal directly to Asia. Patriot Coal Corp. (PCX 20.23, -0.44, -2.13%) announced this week it plans to sell 1.5 million tons of metallurgical coal to steel mills in the Pacific Rim over the next year.

"The Chinese entry into the market - particularly directly into the American metallurgical coal market - is going to make a tight market," said Don Blankenship, Massey's chairman and chief executive, during a conference call with investors Wednesday. "It is apparent it is going to generally be tight for a long time."

The Cumberland deal adds for Massey an estimated 416 million tons of contiguous coal reserves, with just over half having metallurgical coal qualities. Massey plans to ramp up Cumberland's metallurgical production to 5 million tons from 800,000 tons without spending additional development capital. As Cumberland's legacy thermal coal contracts end with power generators, Massey can sell the same output into the metallurgical market. Executives said Cumberland hadn't accessed the higher priced market for several reasons, including limited marketing capabilities.

Global prices for metallurgical coal have rebounded, with Japanese steel mills buying from the BHP Billiton Mitsubishi Alliance, the world's largest coking coal producer, at $200 a metric ton, up from last year's benchmark price of $129 a ton, people familiar with the situation recently told Dow Jones Newswires.

A huge spike in Chinese coal imports in 2009, strong demand in India, and recovery in the U.S. and other developed economies is driving strong pricing and demand. Yet higher metallurgical prices will bring new production on line and pull more coal from the thermal markets.

"Obviously the question is how sustainable is this," said Raymond James analyst Jim Rollyson of the metallurgical market.

Under the deal, Massey will pay $640 million in cash and $320 million in stock. Massey, which won't incur any debt in the deal, will pay for a majority of the deal with cash on hand. But company executives said they will have to do some financing to ensure strong liquidity, including possibly issuing new equity.

Part of the reason to raise additional capital is the potential for additional acquisition opportunities. Blankenship said Massey will look for further deals, including agreements with smaller producers. The company also is looking at natural gas acquisitions amid a boom in deal activity for shale gas reserves in the U.S.

"We haven't found (a gas deal) that provides anywhere near the attractiveness that this acquisition does," Blankenship said of the Cumberland deal.

Shares of Massey were up 6.8% to $53.62 in recent trading. The company expects to close the Cumberland deal in the second quarter of the year.

Source from: www.marketwatch.com