The Alpha Natural Resources (ANR) acquisition of Foundation Coal ( FCL) will create the nation's third largest coal producer, a consolidation that will help the sector as economies of size and synergies will drive efficiency, said an analyst on Tuesday.

Alpha Natural Resources said Tuesday it plans to buy Foundation Coal for about $1.4 billion in stock. Foundation Coal shares soared $4.76, or 21%, to $28.01 in afternoon trading, while shares of Alpha slid $1.88, or 6.5%, to $26.95.

Bill Burns, an analyst with Johnson Rice & Co., said that consolidation, especially in central Appalachia, is viewed as good, and pointed to some other signals for possible long-term sector recovery.

"The general feeling is that (the China stimulus package) is working a lot better than the U.S. stimulus package," Burns said. If China's economy recovers, this could translate to a material turnaround for manufactured imports and in turn, help the coal sector rebound.

In the near future, the industry continues to struggle against the lack of demand for electricity and hefty inventory levels, Burns said.

"Coal production in the U.S. is down quite a bit, but the demand for it is down a little more," he noted, adding that, on the bright side, steel companies have reached a more manageable level of inventories, though levels could be lower.

By mid-afternoon, coal stocks were mostly trading slightly higher. James River Coal ( JRCC) shares gained $1.09, or 5.%, to $21.24. Shares of Walter Energy ( WLT) rose 88 cents, or nearly 3%, to $30.98. Shares of Arch Coal ( ACI) climbed 52 cents, or 3%, to $18.30.

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