Arch Increases PRB Exposure – Analyst Blog

Arch Coal Inc. (ACI) announced that it has bid successfully for a state coal lease in Montana. The company made a one-time bonus bid of $85.8 million, payable in April 2010, for the right to mine about 8,300 acres of state-owned minerals in the Otter Creek Tracts in southeastern Montana.

 

Arch now controls approximately 1.5 billion tons of coal in Montana’s Otter Creek area, including previous reserve additions such as the coal lease secured in November 2009 through Great Northern Properties Limited.

 

Arch has a significant amount of reserves and is one of the top three producers in the Powder River Basin (PRB). Through this lease, the company is seeking to strengthen its operations in the PRB coal fields. The combined Otter Creek coal reserves are perceived as a strategic platform for growth in the Northern PRB.

 

Management believe these Northern PRB reserves will help the company competitively serve U.S. power producers, supply additional coal for export to emerging Asian countries or possibly house a future coal-conversion facility.

 

St. Louis, Missouri-based Arch Coal is one of the largest coal producers in the U.S., operating 20 mines across the major low-sulfur coal basins of the country. The company primarily conducts its business through three operating segments: Powder River Basin, with operations in northeastern Wyoming and southeastern Montana; Western Bituminous (WBIT), with operations in western Colorado, eastern Utah and southern Wyoming; and Central Appalachian (CAPP), with operations in eastern Kentucky, Tennessee, Virginia and southern West Virginia.

 

Coal mined from the PRB region has very low sulfur content. In our opinion, PRB coal will be in great demand over the coming years. Going forward, the significant coal-fired power plant build-out will increase annual thermal coal demand by more than 43 million tons, most of which will be fueled by PRB coal.

 

We believe Arch Coal’s well-capitalized, low-cost operations provide a competitive edge over smaller players in the industry. In addition, Arch’s PRB assets reflect visible long-term value, positioning it to capitalize on the resurgence in coal demand once the global economy stabilizes. Moreover, its strong balance sheet will enable it to pursue high-growth investment opportunities, particularly at a time when valuations are depressed. We maintain our Neutral recommendation on ACI.