Massey Energy plans to raise $850 million

Coal mine operator Massey Energy said Tuesday it plans to raise at least $850 million in fresh capital as it continues an ambitious plan to increase production.

The bulk of the money would come from the sale of $600 million in convertible notes, Massey said. The Richmond, Va.-based company also plans to sell $250 million worth of common stock. Both would be underwritten by UBS Investment Bank and J.P. Morgan Securities Inc.

Separately, Massey said it is offering to repurchase $335 million worth of notes.

The twin announcements come as Massey tries to increase annual production about 25 percent to 50 million tons, from 39.5 million tons in 2007. The expansion plan announced last October is designed to take advantage of soaring international coal demand and prices.

The weak U.S. dollar, high ocean shipping rates and other factors have driven the price of Appalachian coal sold to electricity generators up to $140 a ton, from $45.60 a year ago. Surging international steel production has pushed the price of Appalachian metallurgical coal used to fire blast furnaces as high as $250 a ton, from about $90 a ton last year.

A document filed with the Securities and Exchange Commission Tuesday indicates only that funds from any impending offerings would be used for general corporate purposes such as acquisitions, repaying debt or working capital.

But Massey figures to have plenty of uses for the money.

Besides a series of new mines, Massey is planning to build as many as six additional processing plants and considering opening up reserves beyond its traditional base of West Virginia, eastern Kentucky and Virginia. New mines are possible in Pennsylvania and western Kentucky, Chief Executive Don Blankenship said last Friday. Moving into western Kentucky would put Massey into the Illinois Basin coalfields.

So far, Massey has made the expansion pay off.

Excluding a $245.3 million charge related to a contract lawsuit, the company earned $92 million, or $1.15 per share, in the second quarter. That easily beat the 76 cents per share expected by analysts polled by Thomson Financial.

Massey has increased pricing expectations to $84 to $92 per ton for 2009, from an earlier range of $65 to $74 per ton. For 2010, Massey is projecting a range of $115 to $132 per ton, up from $75 to $87 per ton.

The strong quarter prompted securities analysts to raise their assessments of Massey.

"We expect similarly strong operating performance in the near term given our expectation that positive coal industry fundamentals will continue," Standard & Poor's Rating Services said Monday when it revised its Massey outlook to stable and affirmed its credit rating. "As a result, the company's financial profile is likely to remain at a level we would consider to be strong for the current rating."

Shares of Massey fell 1 cent to $65.90 Tuesday.