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Arch Coal on Asset Divestment Mode

Arch Coal Inc. (ACI) continues with its strategic asset divestment program. The company announced that it has divested its subsidiary Hazard Complex to Blackhawk Mining, LLC ("Blackhawk"). Prior to post-closing adjustments, the deal value was $26.3 million in cash.

Per the agreement, Blackhawk obtained the Hazard thermal coal mining complex and allied infrastructure. Post transaction, Blackhawk added around 38 million tons of thermal coal reserves in eastern Kentucky to its portfolio.

This transaction enables Arch Coal to pass on $15.6 million of reclamation liabilities to Blackhawk. The company expects to be discharged from $43.8 million of reclamation surety bonding.

As Arch Coal will retain selective coal reserves at Hazard, the company is expected to obtain future royalty payments of $35 million in aggregate over the next five years.

We note that Arch Coal had obtained ownership of Kentucky-based Hazard Complex from the acquisition of International Coal Group (“ICG”) in Jun 2011. The complex includes four active surface mines - East-Mac & Nellie, Rowdy Gap, Bearville and Thunder Ridge. The Teton preparation plant and Kentucky River Loading facility are also part of this thermal coal complex.

Blackhawk owns and operates four underground and five surface mines, and two processing and loading facilities in Kentucky.

Arch Coal sold 1.7 million tons of thermal coal, sourced from Hazard Complex, in 2013. This property provided $4.8 million of earnings before interest, taxes, depreciation and amortization to the company last year.

We remind investors that Arch Coal is continuously selling its assets. Including the latest transaction, the company has already made two divestments so far this year. On Feb 10, 2014, Arch Coal sold its wholly-owned subsidiary, ADDCAR Systems, L.L.C. to an Australian firm, UGM Holdings Pty. Ltd. for $21 million.

We consider these divestitures as a strategic move to address the company’s long-term objective of focusing more on profitable ventures while lowering its debt burden.

As per a World Steel Association report, the long-term prospects for metallurgical (met) coal remain bullish due to chances of improvement in demand in the Asian, North African, European and the Middle East markets in the coming years. This is primarily due to higher steel demand driven by growth in the automotive, energy and residential construction sectors.

The divestiture will allow Arch Coal to allocate its resources as per market conditions and priorities, particularly concentrating on the budding Appalachian met coal franchise and the low-cost Western thermal coal platform. In addition, the proceeds from the transaction will strengthen Arch Coal’s liquidity. The company can utilize the funds to enhance its met coal reserves, thereby meeting growing future demand.

Arch Coal Inc. currently has a Zacks Rank #3 (Hold). However, some better-ranked stocks in the same sector include Rhino Resource Partners LP (RNO), Range Resources Corporation (RRC) and Warren Resources Inc. (WRES), each with a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on RRC
Read the Full Research Report on ACI
Read the Full Research Report on RNO
Read the Full Research Report on WRES

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