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Coal Stocks Riding on M&A Activity

NEW YORK (TheStreet) -- Walter Energy (WLT) and Patriot Coal (PCX) were among the top metals and mining stocks last week.

Strong M&A activities in the mining sector pushed coal stocks higher, especially after China revealed a 3.8 billion tonnes increase in coal demand by 2015. Subsequently, commodity prices went on a roll, and mining companies and steelmakers around the world are now seeking high-quality reserves that can be shipped around the world by acquiring or merging with smaller entities, thus expanding their existing resource base.

Walter Energy, producer and exporter of metallurgical coal for the global steel industry, was among the major gainers, up 11.5% past week. The company recently announced a $3.3 billion takeover bid for Canadian miner Western Coal as escalating demand from the rapidly industrializing China boosts global consumption further, raising the need for securing additional coal assets. The deal, if finalized, would lead to the formation of a steelmaking coal giant with an annual coal production capacity of more than 20 million tons by the end of 2013. The company would be the world's largest publicly traded "pure-play" metallurgical coal producer.

Patriot Coal, producer of coal in eastern U.S., gained 8.6% last week. The stock has been increasing after Owensboro Municipal Utilities (OMU) agreed to modify coal supply contracts by raising the contract price to $1.72 from the earlier $1.56 in exchange of Patriot not canceling its contract and exposing OMU to higher coal costs of around $4 million. The modification implies that the coal company will receive more money for the coal shipped to the OMU plant. In a similar move, OMU entered a contract for modifying coal prices with Western Kentucky Minerals.

James River Coal (JRCC), a processor and seller of bituminous, steam, and industrial-grade coal through six operating subsidiaries, jumped 7.1% after industry reports said Peabody Energy (BTU) was considering buying James River.

Meanwhile, Arch Coal (ACI) rose 4.1% past week. The company recently expressed interest in Massey Energy (MEE), attracted by the latter's large metallurgical coal reserves, as compared to any other U.S.-based company. The company is poised for robust growth as it is tied to the rapid expansion in developing countries including India and Brazil. Besides Arch, ArcelorMittal (MT) and Alpha Natural Resources (ANR) have also offered takeover bids for Massey. Alpha Natural Resources gained 4.5%, while Massey Energy added 4% last week.

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