Arch Coal Boosts PRB Reserves - Analyst Blog

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Arch Coal Inc. ( ACI ) expanded its coal reserves in the Powder River Basin ("PRB") through a successful bidding of a coal lease. The bid was for the South Hilight tract in the southern PRB.

Arch offered $1.35 per ton for the South Hilight reserves, estimated to contain 222 million tons of minable coal in Campbell County, Wyoming. The company will pay the bid amount of $300 million in five equal installments with the first one of $60 million to be paid immediately.

Coal from this reserve has an average heat content of more than 9,000 British thermal units (Btu) per pound and an ultra-low sulfur dioxide content of less than 0.55 pounds per million Btus. This high quality ultra low sulfur dioxide content coal is in huge global demand due to exceedingly stringent government regulation on emission.

Besides, South Hilight is located adjacent to Arch's operational Black Thunder mine in PRB. The latter also contains high quality coal, with an average heat content of more than 8,900 Btus per pound. The heat content of the coal produced from Arch is higher than the coal produced from mines in southern PRB.

In 2010, 82% of the sales were from the coal generated from PRB. This new lease will add to the high quality coal production of the company and can act as a tailwind going forward. We hope the winning of the bid would help the company to recover from its dismal performance in the third quarter of 2011. The third quarter performance was affected by Midwestern flooding on rail service, and reduced profitability at the Mountain Laurel operation in Appalachia stemming from geologic challenges.

We believe the decision to take South Hilight coal reserves on lease is a well thought out strategic move and is going to benefit the company going forward. The company will leverage its existing operation in PRB and integrate the new lease into its existing mine at Black Thunder.

Arch Coal currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Another big operator in the PRB, Peabody Energy Corp. ( BTU ) recently expanded its international presence through the acquisition of Macarthur Coal in Australia.

Based in St. Louis, Missouri, Arch Coal engages in the production and sale of steam and metallurgical coal. The company also ships coal to domestic and international steel manufacturers as well as international power producers.

ARCH COAL INC ( ACI ): Free Stock Analysis Report

PEABODY ENERGY ( BTU ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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