Arch Coal, Patriot in Met Coal Deal

Zacks

Arch Coal Inc.’s (ACI) share price jumped 8.3% to close at $4.18 on Oct 14, 2013 from Oct 10, 2013 thanks to the company’s agreement to purchase the Gruffy property from Patriot Coal Corp. for $16 million.

In addition, Arch Coal announced that it will resolve all pending and potential legal issues with Patriot arising from Arch Coal's sale of coal companies to Magnum Coal Company, a subsidiary of ArcLight Capital Partners LLC, in 2005 and the subsequent purchase of those companies by Patriot in 2008. In return for this release, Arch Coal will pay $5 million in cash to Patriot upon its exit from bankruptcy.

The settlement also includes the release of a $16 million letter of credit posted by Patriot in Arch's favor for surety bonds related to the companies sold to Magnum. The settlement relieves Arch Coal from expensive legal obligations and will allow the company to realign its business to counter the currently challenging market conditions.

The Gruffy assets are located adjacent to Arch Coal’s Tygart Valley asset and the Leer mine. The coal reserves at the Gruffy properties are similar in quality to the Leer mine’s high-volatile "A" metallurgical coal (met coal).

The buyout of Gruffy reserves will allow Arch to recover up to an incremental 8 million tons of metallurgical coal at the Leer mine. This will increase the estimated lifespan of the Leer mine by nearly three years.

This acquisition will boost Arch’s metallurgical coal portfolio in the Appalachia and will help meet the increasing demand for coal in the Asian countries in the coming years. Steel utilization is expected to peak by 2020 with rising infrastructure development activities in countries like India, China and South Korea. South America will also be a key contributor to met coal demand growth.

Nonetheless, the Environmental Protection Agency’s latest proposal regarding carbon dioxide emission reduction will make coal a less attractive option for coal-fired operators. This will impact prominent coal suppliers like Arch Coal.

Currently, Arch Coal carries a Zacks Rank #3 (Hold). However, other well-placed coal operators include Zacks Ranked #2 (Buy) James River Coal Co. (JRCC), Peabody Energy Corp. (BTU) and SunCoke Energy Partners, L.P. (SXCP).
 

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