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:
- Welcome to the ultimate commodity update.
- The case for coal in 2009.
- This gold miner made a similarly bold move.
