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Arch and Peabody to integrate US PRB and Colorado assets in joint venture

Published by , Assistant Editor
World Coal,

Arch Coal, Inc. and Peabody Energy Corporation yesterday entered into a definitive agreement to combine the companies' Powder River Basin and Colorado assets in a highly synergistic joint venture, aimed at strengthening the competitiveness of coal against natural gas and renewables, while creating substantial value for customers and shareholders.

The joint venture is expected to unlock synergies with a pre-tax net present value of approximately US$820 million. Average joint venture synergies are projected to be approximately US$120 million per year over the initial 10 years. The joint venture will be 33.5% owned by Arch and 66.5% owned by Peabody.

"We are excited about this transaction's potential to enhance the value of Arch's top-tier thermal coal assets," said Arch CEO John W. Eaves. "This new joint venture should allow us to realise the full potential of our valuable assets in the Powder River Basin and Colorado and benefit our customers in the process. The significant operating synergies will enhance the competitiveness of these assets and also enable us to continue to generate long-term, sustainable returns for our shareholders. We look forward to completing this transaction in a timely manner."

"The Peabody/Arch joint venture is an extraordinary example of industrial logic targeted to strengthen the competitive position of our products and create significant value for multiple stakeholders in a low-cost combination with exceptional physical synergies," said Peabody President and CEO Glenn Kellow.

"The transaction unites two strong, culturally aligned workforces with a commitment to core values such as safety and sustainability. We believe this joint venture allows us to offer enhanced products and security of supply for customers, increased value for shareholders, greater efficiencies for railroads, long-term opportunities for employees and strength for the communities in which we operate."

Governance of the joint venture will consist of a five-member board of managers appointed by Arch and Peabody. Each party will have voting rights in proportion to its ownership percentages, with certain items requiring supermajority approval. As the operator, Peabody will manage all activities including the marketing of coal. Arch and Peabody will share profits, capital requirements and cash distributions of the joint venture in proportion to ownership percentages.

Among other assets, the joint venture will combine two productive and adjacent US coal mines – Arch's Black Thunder Mine and Peabody's North Antelope Rochelle Mine (NARM), which share a property line of more than seven miles – into a single, lower-cost complex.

Aggregated synergies are expected to enable the joint venture to significantly reduce costs well beyond what each company could achieve alone. A lower cost structure enables coal to better compete against other energy sources for electricity generation and create value. Expected substantial synergies include, among others:

  • Optimisation of mine planning, sequencing and accessing otherwise isolated reserves;
  • Improved efficiencies in deployment of the combined equipment fleet;
  • More efficient procurement and warehousing;
  • Enhanced blending capabilities to more closely meet customer requirements;
  • Improved utilisation of the combined rail load-out system and other rail efficiencies;
  • Reductions in long-term capital requirements; and
  • Leveraging of shared services.

Underpinning the combination, Peabody has the lowest cost position among major Powder River Basin (PRB) producers and Arch has some of the highest-quality coal in the PRB. Arch is contributing its low-cost, higher-margin West Elk Mine that enhances Peabody's Twentymile Mine in Colorado. Further PRB synergies are expected from the integration of the Caballo, Rawhide and Coal Creek mines, which have some of the best overburden-to-coal ratios in the world. Together with Black Thunder and NARM, the PRB assets represent five of the ten most productive mines in the US. The inclusion of the Colorado assets will lead to additional synergies and offer the ability to better serve domestic customers while preserving seaborne coal optionality.

The combination of assets from two recognised companies is expected to advance continued responsible mining and reclamation for decades to come, benefiting all stakeholders.

"In addition to enhancing the competitiveness of our western thermal coal platform, this move represents an excellent fit with our well-defined strategy for long-term value creation and growth," Eaves said. "While we expect our thermal coal assets to contribute significantly to our overall financial performance well into the future, we plan to focus our future growth and all of our projected growth capital on our core metallurgical coal segment. Earlier this year, we announced plans to develop a second, world-class, High-Vol A longwall mine on the Leer reserves in northern West Virginia, and will continue to evaluate additional investments on this 200 million t reserve base over time. Looking ahead, we anticipate continued, favourable market dynamics in global metallurgical coal markets, and view our premier coking coal portfolio as the centrepiece of our strategy to drive exceptional, long-term returns."

At the same time, Arch plans to drive forward with its highly successful capital return programme. Since launching the programme in May 2017, Arch has returned US$725.6 million to shareholders via buybacks and dividends. As part of this programme, Arch has bought back 8.1 million shares, or nearly one third of its initial shares outstanding, through 31 March 2019. "With our strong and increasingly valuable metallurgical coal portfolio and continuing contributions from our thermal coal assets, we remain sharply focused on generating high levels of free cash that we can use to fuel our robust and ongoing capital return programme," Eaves said.  

Arch and Peabody will continue to operate the assets independently until closing of the transaction. Closing is subject to regulatory approval and the satisfaction of customary closing conditions. Upon closing, Arch and Peabody will each contribute its active Powder River Basin and Colorado mines, as well as related assets and liabilities, into the joint venture. Each company expects to proportionally consolidate the joint venture within their respective financial statements.

In 2018, on a combined basis, the assets shipped 206 million t of coal. The assets are operated by a workforce of approximately 3300, with combined proven and probable reserves totalling 3.4 billion t as of 31 December 2018.

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