Arch Coal, the second-largest US producer of the fuel, has made a move to strengthen its position in higher value metallurgical coal with an agreed deal to buy International Coal Group for $3.4bn in cash.

The deal, the latest in a series of takeovers in the US coal sector in recent months, is worth $14.60 per ICG share, a 32 per cent premium to the closing price on Friday night.

It will make Arch the second-largest US producer of metallurgical, or “met”, coal, used for steelmaking, and one of the ten largest in the world. Met coal commands a large price premium over thermal coal used for power generation and has risen sharply on world markets because of strong global demand for steel.

The North American coal industry has been going through consolidation over the past year, with Walter Energy’s $3.3bn acquisition of Western Coal and Alpha Natural Resources’ deal to buy Massey Energy for about $8.5bn including debt.

Last year, reports suggested Massey could be a buyer for West Virginia-based ICG, and Arch was said to be looking at a bid for Massey.

Arch is paying about 17 times ICG’s earnings before interest, tax, depreciation and amortisation, compared to a multiple of about 23 times paid by Alpha for Massey.

ICG shares hit a low of $1.24 in March 2009, less than 10 per cent of the value of the Arch offer, and were about $5 a year ago.

Steven Leer, Arch’s chief executive, said: “In hindsight, could we have done it earlier? Well maybe ... [But] the intrinsic value of ICG is greater than the market is currently giving as the company is on the cusp of a significant increase in met coal production.”

Met coal makes up only about 5 per cent of Arch’s production today but its shares will rise to 17 per cent after the deal. Output is set to rise sharply with the opening of ICG’s Tygart Valley No. 1 mine in West Virginia, which is scheduled for 2014.

Mr Leer said he expected the combined company’s met coal production to rise from 11m tons in 2011 to 14m-15m over the next three to four years.

He added that he expected a growing share of that production would go to export markets, where prices are typically higher than in the US.

ICG’s reserves, like all US met coal deposits, are in the Appalachia region, centred on West Virginia and Kentucky, on the eastern side of the country and so are not easily accessible for fast-growing Asian markets.

However, Arch has export infrastructure, including a 22 per cent stake in the DTA coal terminal in Virginia, and can use barges to carry coal down the Ohio and Mississippi rivers to the port at New Orleans, from where it can be exported to Europe or Brazil, which also has rapidly rising steel consumption.

The deal will raise Arch’s debts from about $1.5bn at the end of last year to around $5bn, or about 5.1 times earnings before interest, tax, depreciation and amortisation, but the company plans to reduce that to 2.7 times by 2013.

Arch shares fell 2 per cent to $33.66 by noon in New York. ICG was up 31 per cent at $14.42.

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