* Duquesne Capital says deal hurts Alpha shareholders
* Says new co. more exposed to less-lucrative domestic mkt
* Alpha disappointed,says leading proxy advisers back deal (Adds Alpha reaction, further background; updates shares)
NEW YORK, July 20 Duquesne Capital Management, the biggest shareholder of coal company Alpha Natural Resources ANR.N said on Monday it will vote against Alpha's proposed $1.5 billion acquisition of Foundation Coal Holdings FCL.N.
Duquesne said it believes the proposed deal will hurt Alpha shareholders financially and that a merged company would have more exposure to less-lucrative domestic markets rather than more profitable steelmaking metallurgical coal and international thermal coal markets.
"Duquesne sees no advantages to the transaction that can make up for these serious detriments," the investment firm said in a statement. "Duquesne believes it is against the best long term interests of ANR shareholders."
Duquesne owns 5.9 million Alpha shares, which represents more than 8.3 percent of the miner's outstanding common stock. The merger transaction is scheduled to be voted on by Alpha shareholders on July 31.
Alpha's stock closed 5.2 percent higher at $30.10, while Foundation ended 3.8 percent higher at $31.24 on Monday, on a day when coal stocks were broadly higher.
Duquesne, which is run by financier Stanley Druckenmiller, said that after an analysis of Alpha and Foundation it concluded the proposed transaction is financially dilutive to Alpha shareholders by $10-$15 per share. It would also increase balance sheet risk to Alpha through the assumption of Foundation's $650 million pension liability and $530 million in net financial debt.
The transaction "is grossly dilutive to ANR's favorable business posture -- its valuable exposure to the international metallurgical and thermal coal markets, and its favorable employee profile," said Duquesne.
At current market prices, metallurgical coal is performing better than Alpha has assumed, and thermal coal is performing worse than management has assumed, it said.
Alpha said it was disappointed with Duquesne Capital's reaction.
"We have nonetheless been encouraged by the overwhelmingly positive reception from our shareholders," the company said in a statement. "The leading four proxy advisory firms have also recommended shareholders vote for the merger."
Alpha has offered a 35 percent premium for Foundation. Under the terms of this transaction, Foundation stockholders would receive 1.084 shares of the new company for each share held, while each share of Alpha would automatically become one share of the combined company.
Alpha said in May it expects the deal would add to adjusted earnings and cash flow earnings in 2010.
Last year, Alpha itself had been the takeover target of iron ore pellet maker Cliffs Natural Resources Inc (CLF.N). But the proposed cash and stock deal, valued at about $8.3 billion last July, fell apart in November under opposition from Cliffs' largest shareholder, hedge fund Harbinger Capital Partners. (Reporting by Steve James and Michael Erman, editing by Matthew Lewis and Tim Dobbyn)