Following in the footsteps of its bigger rival ArcelorMittal's Brazilian acquisition earlier this week (See: ArcelorMittal takes 49 per cent in Brazilian miner), Russian steelmaker OAO Severstal, through its mining division Severstal Resources, has agreed to buy American coal miner PBS Coals for about $1.3 billion in cash and also signalled its intention to acquire other assets in the continent. (See: ArcelorMittal announces major investments in Brazil)

Severstal will buy a combination of PBS and Penfold Capital Acquisition Corp. for C$8.30 ($7.93) a share, the Cherepovets, Russia-based steelmaker said today in a statement. Penfold Capital, a financial investor, agreed to acquire PBS on 17 June.

Penfold and PBS have entered into a support agreement whereby they have agreed to support Severstal's bid. The support agreement includes a commitment by PBS and Penfold not to solicit or initiate discussions concerning alternative transactions. PBS has agreed to pay a break fee of C$41.9 million to Severstal in certain circumstances and has granted Severstal the right to match competing offers.

Holders of approximately 66.8 per cent of the outstanding shares of PBS, including all directors and officers of PBS, have executed irrevocable lock-up agreements whereby they have agreed to tender their shares to Severstal. Such holders together with the holders who have executed soft lock-up agreements to tender shares to Severstal represent approximately 71.5 per cent of the outstanding shares of PBS.

PBS is engaged in the mining, processing and sale of metallurgical and thermal coal in Somerset County, Pennsylvania, US. PBS's operations are located in the Northern Appalachian Coal Fields, situated between Severstal's North American production centres, and have the capacity to produce over 4 million tonnes of metallurgical coal.

PBS's portfolio includes six underground and six surface mining operations. In the fiscal year ended 31 March 2008, PBS produced approximately 2.4 million clean tonnes of coal, including 1.5 million clean tonnes of coking coal. PBS has 133.5 million tonnes of in-place coal reserves and 228.3 million tonnes of in-place coal resources. In addition to its significant reserves, PBS has an experienced management team and a competitive cost position among international coal producers.

Severstal is expanding in the US to take advantage of a weaker dollar, which has made the nation's steel exports more competitive. Company owner Alexei Mordashov said in June he's seeking iron-ore and coal assets in the US to protect the company from surging prices for its main raw materials. Metallurgical coal is used as both a fuel and reducing agent in steelmaking.

Prices for coking coal, which trades mostly in bilateral contracts, more than doubled in the past year as transportation constraints in Australia and South Africa curbed supplies. Major steelmakers signed contracts in May at $275 a ton, twice the average $97 a ton in 2007.

A steel shortage in the US pushed prices to a record $1,068 a ton in July. Severstal spent $950 million this year buying an ArcelorMittal plant near Baltimore and WCI Steel Inc., based in Ohio. The company also acquired steelmaker Esmark Inc. for about $775 million to sell a wider range of products. (See: Esmark falls for Severstals' revised $775 million bid; Essar withdraws offer)

Roman Deniskin, CEO of Severstal Resources, said, "Severstal Resources believes that the high demand for primary raw materials for steel production, including coking coal and iron ore, will continue due to the strong industrial fundamentals in global metals and mining.''

Explaining the rationale behind the acquisition, he added, ''To keep pace with the global growth of the steel industry, our mining business is capitalizing on the opportunity to expand into a new geographic market, gain access to export markets and diversify its mining technologies. Our significant experience with coal mining in Russia leaves us well positioned to make the most of our acquisition of PBS, ensuring its continued growth by providing additional management and operational expertise. "

Gregory Mason, CEO of Severstal International and COO of OAO Severstal, added his voice to the cause: "Securing the supply of raw materials is a critical piece to maximizing the full potential of our US business. The acquisition of PBS will help ensure that Severstal controls its operating costs by providing a guaranteed supply of metallurgical coal for our coke making operations in the US. The integration of our upstream production, from coal and coke making to steel making, will allow us to sustain profitability and return value to shareholders."