Arch Coal Inc.
) 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.
Peabody Energy Corp.
SunCoke Energy Partners, L.P.
ARCH COAL INC (ACI): Free Stock Analysis
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