MEE Massey Energy Co.

Walter Energy Inc. (WLT) on Friday said it would buy mining rival Western Coal Corp. (WTNCF, WTN.T), formally agreeing to a $3.3 billion deal to create a North American steelmaking-coal giant.

The combined company is expected to be the world's fifth-largest producer of metallurgical coal used in steel production, with strong access to global markets from shipping facilities linked to both the Atlantic and Pacific oceans, the companies said.

Under the agreement, Tampa-based Walter will pay C$11.50 in cash or 0.114 of a Walter share--or a combination of the two--for each Western Coal share. Walter had originally announced its bid for the Canadian company in mid-November, a 56% premium to Western's share price at the time. The deal represents a 12% premium over Western's closing price Thursday.

"This combination will give us undeniable met coal industry leadership," Walter's interim Chief Executive Joe Leonard said on a conference call discussing the merger.

Shares of Walter were recently up 3.2% at $109, while Western's stock was up 11.94% at C$11.53.

The deal comes at a time when interest remains strong in metallurgical coal as global economies recover and Chinese steelmaking booms. Emerging steelmakers Brazil and India are expected to add to demand, increasing market tightness as large new mines aren't likely to come online for several years. Its relative scarcity has turned metallurgical coal into a global commodity, with seaborne shipments becoming increasingly important.

The sector is expected to see further deals with several mining and steel companies reportedly looking at Richmond, Va.-based Massey Energy Co. (MEE) and its 1.3 billion tons of metallurgical coal reserves.

With 13 mines in the United States, Canada and the United Kingdom, Walter and Western said their combination would create the world's largest publicly traded "pure-play" metallurgical coal producer. The combined company expects to produce in excess of 20 million tons of coal by 2012.

"We will grow to new markets while expanding our producing properties," Leonard said, adding the company is aiming to become the world's third-largest metallurgical coal producer "in the not too distant future."

Vancouver-headquartered Western Coal has seen sharp growth lately as commodity prices have boomed. The company said last month that it saw record production during its fiscal second quarter, helping earnings surge and revenue double. Meanwhile, Walter, in October, said its third-quarter profit soared as well, with revenue and margins sharply higher.

"The combined companies will have substantial met coal growth, less mine-concentration risk and a solid transportation advantage," FBR Capital Markets analyst David Khani said in a note to clients.

The deal will require approval from Canadian regulators and follows their rejection last month of Anglo-Australian mining giant BHP Billiton Ltd.'s (BHP, BHP.AU) hostile bid for Potash Corp. of Saskatchewan (POT, POT.T), the world's largest producer of potash, a crop nutrient.

Walter and Western executives on Friday downplayed regulatory concerns.

"It's a pretty straightforward deal," Leonard said during the conference call. "We don't see anything that's particularly unusual."

Company leaders will visit with federal and provincial authorities in Canada, he said. Canadian court approval is required for the combination to be completed.

The company said Friday it expects the deal to improve its bottom line during the first full year following the closing of the deal, set for the second quarter. It will pay 70% cash and 30% stock for Western Coal. Walter plans to apply for listing on the Toronto Stock Exchange.

"With our positive view of met coal over the long term, seizing an opportunity of this magnitude could prove wildly beneficial down the road," Bill Herbert, an analyst with Simmons & Co., wrote in a note to clients Friday.

-By Matt Whittaker, Dow Jones Newswires; 212-416-2139; matt.whittaker@dowjones.com

(Nathan Becker contributed to this report.)

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