Arch to kill proposed Peabody JV, push pivot toward met

Houston — Arch Resources will terminate its proposed joint venture in the Powder River Basin with Peabody Energy and consider selling its Western thermal coal mines, the company said Sept. 29 in the wake of a US District Court decision issued earlier in the day upholding an injunction against the tie-up.

"In the wake of today's decision, we will be intensifying our pursuit of strategic alternatives for our thermal assets – including, among other things, potential divestiture – while evaluating opportunities to shrink the operational footprint at those mines, reduce their asset retirement obligations, and establish self-funding mechanisms to address those long-term liabilities," the St. Louis-based company said.

The company said it "strongly agrees" with the court verdict issued Sept. 29, but that it and Peabody have agreed to discontinue their legal efforts given the significant amount of time and resources required for an appeal.

The US District Court for the Eastern District of Missouri upheld an injunction to the proposed JV that had been issued in February by the Federal Trade Commission.

As a result of the decision, Arch also said it will move "full speed ahead with our strategic pivot towards steel and metallurgical markets."

The company recently changed its name from Arch Coal to embrace such a pivot, and is directing more than 95 percent of its 2020 capital budget to its met coal portfolio, which includes the Leer mine and its related Leer South expansion.

B. Riley FBR analyst Lucas Pipes, in a research note issued Sept. 29, said a ruling allowing the proposed JV "was much more important" to Peabody, and noted that Arch's "low cost met coal portfolio allows for a successful transitioning towards a pure-play met coal company."

"Arch has been vocal in recent years that it sees its future in met coal, especially on the back of its low cost platform surrounding its flagship Leer Mine and Leer South expansion," said Pipes.

Benchmark Company analyst Mark Levin, in a Sept. 29 research note, agreed that while the court ruling "is a disappointment and a setback, but hardly a killer. In fact, we would argue it removes an overhang."

Levin noted that Arch has the potential to generate nearly $15/share of free cash flow by 2022 once its Leer South expansion is completed next year.

Met coal markets have rebounded in the last few months, while the US thermal market remain depressed due to cheap natural gas, increased renewables generation and a drop in power demand.

The Platts assessment for High Vol A met coal FOB US East Coast was assessed Sept. 29 at $122/mt, having dipped to a year-to-date low of $105/mt in mid-August. The price had been as high as $142/mt in early March.