Arch, Peabody to combine western US coal assets

US coal producers Arch Coal and Peabody Energy today announced they will combine their Powder River basin (PRB) and Colorado assets into a joint venture.

Increased competition in thermal coal markets require companies to increase efficiency, drive down costs and reduce future capital requirements, said John Eaves, Arch's chief executive.

"It is hard to envision a better opportunity to achieve such reductions or better fit quite frankly than Arch and Peabody's western thermal coal assets," Eaves said.

The companies expect the joint venture to create an additional $820mn in pre-tax net value for the companies over the life of the mines and reduce costs by $120mn/yr.

The agreement will make mine planning more efficient, enhance blending capabilities, improve rail service and reduce long-term capital requirements, the companies said. They expect the lower cost structure of the joint venture will allow coal to better compete against other energy sources for power generations.

In the Powder River basin, the two companies will combine five mines — Peabody's Rawhide, Caballo and North Antelope Rochelle mines and Arch's Coal Creek and Black Thunder mines. The five mines produced a combined 42.4mn short tons (38.5mn metric tonnes) of coal in the first quarter, accounting for 60.3pc of total PRB production, according to US Mine Safety and Health Administration (MSHA) data.

The Black Thunder and North Antelope Rochelle mines, which share a border and are the two highest producing PRB mines, will be combined into a single complex once the joint venture is implemented. The two mines produced a combined 36.7mn st of coal in the first quarter, accounting for 52.2pc of total PRB production in that period, according to MSHA data.

Also included in the joint venture are two longwall mines in Colorado — Peabody's Foidel Creek mine (also know as Twentymile) and Arch's West Elk mine. The two mines produced a combined 2mn st of coal in the first quarter, accounting for 56.2pc of all coal produced in Colorado, according to MSHA data.

"The inclusion of the Colorado assets offers the ability to better serve domestic customers while preserving seaborne coal optionality," Peabody's chief executive Glenn Kellow said.

The seven mines sold a combined 206mn st of coal in 2018 and have total reserves of 3.4bn st.

The joint venture will be managed by a five-member board appointed by Arch and Peabody, with voting rights proportional to ownership. Economic shares were negotiated on the net present value of the mine plans.

Peabody will operate the mines and market the coal once the joint venture is complete.

The assets will operate independently until closing. Neither company gave a timeline for when the deal would be completed. The joint venture is subject to regulatory approval.