Arch Coal Opens Wide

While risk-aversion and conservatism remain rational foundations for investment strategies during this period of turmoil, the entrepreneurial spirit inside each of us can perhaps find expression in the bold actions of companies we invest in.

Arch Coal (NYSE: ACI  ) woke the coal sector from its slumber this week with a deal to purchase the massive Jacob's Ranch Mine from megaminer Rio Tinto (NYSE: RTP  ) . At $761 million, the deal for this fully operational mine in Wyoming's Powder River Basin values the mine's reserves of 381 million tons at about $2 per ton.

Sweetening the pot considerably, the deal includes all the mining equipment, milling facilities, conveyor systems, rail loading systems, and customer supply contracts that Rio Tinto has assembled. Throw in the fact that Jacob's Ranch is adjacent to Arch's huge Black Thunder Mine -- the first coal mine in the world to ship 1 billion tons -- and you have the makings for one attractive coal deal. Existing sales contracts account for almost 100% of production for 2009.

Accordingly, Arch expects the consolidation of these two mines to yield substantial synergies, making Black Thunder one of the most efficient operations in the industry. After watching operating margins for this coal type decline in recent years to just $1.02 per ton in 2008, Arch Coal will welcome the boost to its profitability in the Powder River Basin while boosting volumes produced by 40% or more.

Fools may not feel entirely comfortable with this deal, however, given the punishment of Teck Cominco (NYSE: TCK  ) shares in the wake of that company's ill-timed acquisition, and the relief felt after Cliffs Natural Resources (NYSE: CLF  ) decided to cancel a bid for Alpha Natural Resources (NYSE: ANR  ) . To make matters worse, both Moody's and S&P indicated a negative outlook for Arch's credit rating if the deal closes.

These are legitimate concerns in the present credit environment, but since Arch Coal expressed its intention to purchase distressed assets last month, I will give management the benefit of the doubt and suggest that Arch is entering the deal with both eyes open. Rio Tinto intends to sell three more coal assets in the U.S., and the willingness of potential buyers like Peabody Energy (NYSE: BTU  ) to trade liquidity for opportunity as Arch has done will provide a welcome window into the industry's internal outlook. Stay tuned, Fools.

Further Foolishness:

The "Coal" tag within the Motley Fool CAPS community lists 21 coal companies. Find out what other investors are saying about the stocks you're watching, or share your Foolish thoughts with us. CAPS is free and fun!

Fool contributor Christopher Barker wishes he could squeeze coal into diamonds. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Arch Coal, Cliffs Natural Resources, Peabody Energy, and Teck Cominco. The Motley Fool scrubs its disclosure policy before releasing it into the atmosphere.


Read/Post Comments (3) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 12, 2009, at 1:51 PM, Brettze wrote:

    Stop worrying too much about dirty coal... Why?? Because coal fired powerplants is much cleaner than your fireplaces and woodstoves !!! Have you ever thought about that???

  • Report this Comment On March 16, 2009, at 9:59 PM, trade4america wrote:

    The coal that both companys produce is Metalurgical (sp) Coal; which is used in the steel making process. Either way you look at it the prices will drop per tone once the current contracts run out. Teck's share is already showing this loss. Once China, States, and the other big guns come through with their new Infrastructure plans we will see the prices go right up. Comparable to prices per tone in 2007. Now is the time to purchase this stock. Cheap,Not too Long Term, Div. back in 2010. What's not to like.

  • Report this Comment On June 24, 2009, at 8:29 PM, Momto2Miners wrote:

    What I haven't seen reported yet is how many miners have been laid off since this acquisition. At West Elk in Somerset, CO at least 160 miners are now jobless!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 849368, ~/Articles/ArticleHandler.aspx, 10/25/2014 4:49:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement