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Coal mining has been one of the big post-pandemic era winners. Two US coal companies want to ensure that they are positioned for the inevitable comedown. On Wednesday, Arch Resources and Consol Energy announced that they are merging in an all-share transaction. The new company, to be called Core Natural Resources, is to be worth $5.2bn in equity, with just over half of the shares going to Consol’s shareholders.
Since the end of 2019, shares of Consol have jumped more than 6 times while those of Arch have almost doubled. Both are heavily focused on exporting coal to Asia in particular, both for power generation as well as steel and cement making.
The 2010s were marked by weak commodity prices and a rash of coal bankruptcies, including Arch’s in 2016. But the ESG stigma around coal-fired electricity has faded somewhat in recent years following unprecedented demand. Commodity prices and social attitudes can, though, flip again quickly, making consolidation at the current moment of strength appear sensible.
Coal consumption hit a record high of 8.7bn metric tons in 2023, according to the International Energy Administration. While usage in Europe and the US declined, China and India more than made up for the western world. In 2019, Consol’s cash margin per short ton was just $15. By 2023, that spread had widened to $38.
The new Core Natural Resources will have $1.4bn in annual free cash flow, even before any synergies. Together, Arch’s and Consol’s cash balances will exceed debt, with the combined enterprise value of the companies slightly less than the $5.2bn equity value. As such, the implied EV to free cash flow multiple is under 5 times. The modest valuation comes from investors leery of volatile commodity prices. Many remain squeamish about high carbon emitting businesses.
Glencore recently announced that it would keep its coal business rather than pursuing a previously mooted spin off. Glencore’s chief executive Gary Nagle cited a change in attitude towards ESG but the cash generation from coal at the moment is too good to pass up. Consol and Arch themselves have returned to their shareholders nearly $2bn together in 2022 and 2023. In many applications coal has been hard to replace as an industrial input, whatever its social and moral costs. It is similarly hard to forsake for investors when such returns are available.