Foundation Coal opens on NYSE


Linthicum Heights-based Foundation Coal Holdings Inc., the nation's fourth-largest coal producer, began trading its shares yesterday, becoming the newest publicly traded company in a state better known for its strengths in biotechnology, technology and financial services.

Though the shares received a tepid welcome, analysts say Foundation Coal, with mines in Appalachia, Illinois and Wyoming, is well-positioned to benefit from coal's increasing popularity. The shares, traded on the New York Stock Exchange under the ticker symbol FCL, slipped to $21.75 from their initial public offering price of $22. Even with the 25-cent dip, the value of the coal producer's 44.4 million shares approached $1 billion.

Mostly overlooked in the technology-laden New Economy, coal is enjoying a renaissance as demand for electricity surges with the economy and investors go in search of energy stocks that are immune to volatile Middle East politics.

The company, which has fewer than 100 employees at its headquarters in northern Anne Arundel County, was formed in July with the former North American assets of German energy conglomerate RAG Coal International AG.

After climbing to $23.45 per share in early trading, Foundation shares ended down on a day when its biggest competitors - Peabody Energy, Consol Energy and Massey Energy Co. - all saw their shares climb. Peabody's share price has risen 85 percent this year, and Foundation Coal also was expected to ride the wave with its highly anticipated initial public offering.

"It was a play on the momentum of the sector, but didn't quite do what we hoped," said Ben Holmes, a principal at Boulder, Colo.-based Protege Funds. "I think they emerged too aggressive on pricing."

The company took advantage of the renewed interest in coal to increase its initial public offering price to $22 Wednesday evening, up from the $17 to $19 range it had estimated when it filed to go public in August.

Foundation Coal executives declined to discuss the company yesterday, saying lawyers had advised them not to comment in the period immediately after the offering.

Foundation got its beginning when Germany-based RAG AG, which kept offices in Maryland, put its U.S. coal operations on the block last year. Most of its mines are in Appalachia, though 63 percent of its tonnage in 2003 came out of the Powder River Basin near Gillette, Wyo.

First Reserve Corp., a Connecticut investor in energy companies, and its partners, New York's Blackstone Group LP and American Metals and Coal International Inc., bought the assets for $975 million in a deal that closed July 30.

First Reserve and Blackstone each own 42 percent of the company and AMCI has 15 percent. The company's top managers - all former RAG executives - own about 1 percent. The headquarters stayed in Maryland, where James F. Roberts, Foundation's president and chief executive, was based during his tenure with RAG.

The partners, who put up $200 million of their own money and financed the rest, expected to net $440.7 million from the sale of 23.6 million shares, based on a $20-per-share offering price, according to documents filed Tuesday with the Securities and Exchange Commission. Of that, $394.3 million was to be paid back to the partners in the form of a special dividend, while the remaining $46.4 million was to go to pay down debt. Updated figures were not available yesterday. The partner companies will retain their shares in Foundation.

Analysts expect the coal sector to remain attractive for several years, as is demonstrated by renewed interest from investors such as International Steel Group founder Wilbur L. Ross.

Ross, who built the nation's biggest steel company with the bankrupt assets of Bethlehem Steel Corp. and others, led the $786 million purchase in October of Horizon Natural Resources Co. of Ashland, Ky. Ross said he was betting that the bankrupt coal mining company could be made profitable again as coal prices continue to rise after hitting a trough in 2002.

Analysts say politics and global economic forces are driving interest in coal. With Republicans in charge of Congress and President Bush holding on to the White House, coal advocates are finding a friendly regulatory atmosphere, analysts said.

Dozens of new coal-fired power plants are on the drawing board as electric utilities move away from natural gas, which has increased in price along with oil.

"The issue now is that natural gas prices are just so high and coal is extremely economical compared to the high and volatile gas prices," said Bill Burns, an analyst with Johnson Rice & Co. in New Orleans.

The Powder River and Central Appalachia coal mined by Foundation is low in sulfur, which means it can be burned by power plants without having to be "scrubbed" to remove pollutants as required by the Clean Air Act. The price for Powder River coal hasn't gone up as quickly as that for low-sulfur Appalachia coal, Burns said. But Powder River has greater capacity for expansion.

Also driving prices is increased demand in China, which uses coal to produce steel and power its growing industrial base. Once a significant exporter, China is using more of its coal domestically. At the same time, Burns and others said, Europe is increasingly buying coal from the United States, where coal producers are benefiting from a weak dollar and lower transportation costs.

Demand is especially high for metallurgical-grade coal, which is used to fire furnaces at U.S. steel plants, said William Watson, head of the coal group at the Energy Information Agency. As manufacturing activity picks up, demand for steel rises and puts pressure on coal stocks. Some producers have tried to sell more of their coal to the steel market, putting further pressure on prices, he said.

Foundation Coal sells primarily to about 85 foreign and domestic power plants, steel producers and industrial users. The company, which as RAG Coal International had sales last year of $994 million, said in its SEC filings that it is the only coal producer with major operations and reserves in both the Powder River Basin and Northern Appalachia - both regions the EIA expects to experience strong growth in demand.

"There is lots of upward pressure on low-sulfur coal prices and tremendous profits for those who have it," Watson said.

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