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Judge grants injunction blocking Peabody-Arch joint venture in western US coal

A federal judge ruled that the Federal Trade Commission demonstrated a proposed joint venture between Arch Resources Inc. and Peabody Energy Corp. would harm competition in the southern Powder River Basin coal market and granted a motion for a preliminary injunction blocking the deal.

Peabody and Arch previously argued that the deal was crucial to competing against other fuel sources such as renewable energy and natural gas, but U.S. District Judge Sarah Pitlyk granted the FTC's injunction through a Sept. 29 filing with the U.S. District Court for the Eastern District of Missouri. Coal companies in the Powder River Basin, which produce thermal coal for power generation and have fewer outlets to other markets than other producers in the U.S., are particularly under stress as domestic demand for coal has declined sharply.

"The JV is likely to cause unduly high market concentration in the market for [southern Powder River Basin] coal, which, despite the headwinds facing the coal industry, is projected to continue supplying a significant portion of the fuel for electricity generation in the United States for decades to come," the judge wrote. "The evidence offered by defendants to rebut the FTC's prima facie case makes clear that there is meaningful competition between [southern Powder River Basin] coal and other fuels, but it does not rebut the FTC's central claim that there is meaningful coal-on-coal competition that would be lost if the parties were allowed to consummate the JV."

Peabody and Arch, the two largest miners by production volume in the region, first announced their intention to form a joint venture of their Powder River Basin and western coal assets in June 2019. Arch has since been pivoting to a focus on its metallurgical coal assets in the eastern U.S.

When the companies announced the deal, Arch and Peabody said it would unlock synergies with a pretax net present value of about $820 million, with an annual average of $120 million in joint venture synergies over the initial ten years. The FTC warned in June court filings that the deal between the two companies would create a "coal behemoth" in the basin that would squash competition and increase prices for consumers.

Peabody impaired the value of its North Antelope Rochelle mine, the largest in the Powder River Basin, by $1.42 billion in the second quarter. On Arch's second-quarter earnings call, President and CEO Paul Lang said the company does not see itself "going back to where we've been" in terms of its thermal coal operations in the west.

"We're going to have to consider whatever steps are necessary," Lang said. "Frankly, I think one step is to continue to shrink down the operations and drop production at some of the mines and look around phase closures of the operations. I think that's just the reality of what we're facing."

Peabody expressed their disappointment in the decision in a Sept. 29 statement.

"We are deeply disappointed with the court's decision as the intense all-fuels competition is clearly apparent to us," Peabody President and CEO Glenn Kellow said. "Our focus now is on continuing to be the low-cost PRB coal provider to best compete against natural gas and subsidized renewables. We remain committed to ensuring our customers continue to have access to a reliable and affordable fuel source."

In a statement, Arch said it strongly disagrees with the verdict, but it agreed with Peabody to not pursue any additional legal efforts "given the significant investment of time, resources and expense that would be required to conduct an appeal."

"While we are disappointed with the court's decision, we intend to move full speed ahead with our strategic pivot towards steel and metallurgical markets," Lang said. "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."