Coal companies’ joint venture dead; Arch considers 'alternatives' for PRB mines

GILLETTE – A U.S. District Court decision to block a joint venture between Peabody Energy Corp. and Arch Resources Inc. could also mean the beginning of the end of Arch as a major Powder River Basin coal producer.

In a statement reacting to Tuesday’s court decision to uphold a Federal Trade Commission objection to the joint venture, Arch Resources said it will “terminate” its participation in the joint venture moving forward and will pursue “strategic alternatives for its thermal assets … including, among other things, potential divestiture.”

In the mean time, Arch’s statement says the company will continue to evaluate “opportunities to shrink the operational footprint at those mines.”

Arch operates the Black Thunder and Coal Creek mines in Campbell County, which together employ nearly 1,140 people and produced 74.5 million tons of coal in 2019, 72 million from Black Thunder alone.

That Arch would react to the court’s decision to uphold the FTC objection to the joint venture isn’t a surprise, said Rob Rob Godby, Director of the Center for Energy Economics and Public Policy at the University of Wyoming College of Business.

“Arch has been pretty clear for while now thermal coal is not in their future,” he said. “They even took ‘coal’ out of their name.

“It was clear from the get-go that Arch wanted out of the basin, which is why Peabody would’ve been running the joint venture. It’s been pretty obvious Arch has wanted out of thermal coal.”

In May, Arch changed its name from Arch Coal Inc. to Arch Resources.

The companies could have appealed the decision and continued to push for the joint venture, but that apparently won’t happen.

“Arch strongly disagrees with the verdict and continues to believe that the joint venture would have served the best interests of all stakeholders,” Arch says in its statement. “Nonetheless, after extensive consideration and discussion, Arch and Peabody have agreed to discontinue legal efforts …”

For Arch, that means it will move forward with a focus on its metallurgical coal operations, said Chief Executive Officer Paul A. Lang.

“While we are disappointed with the court’s decision, we intend to move full speed ahead with our strategic pivot toward 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.”

Arch has been a major player in PRB coal since it bought its Wyoming mines from Atlantic Richfield in 1998.

Peabody Energy also is “deeply disappointed” with the ruling, said President and CEO Glenn Kellow in a press release.

"Our focus now is on continuing to be the low-cost PRB coal provider to best compete against natural gas and subsidized renewables,” Kellow said. "We remain committed to ensuring our customers continue to have access to a reliable and affordable fuel source.”

What the decision means is the federal court upheld the argument of the FTC that the joint venture would essentially make the Peabody/Arch partnership a monopoly that could result in higher energy prices for customers, Godby said.

In a statement responding to the decision by the U.S. District Court for the Eastern District of Missouri, FTC Bureau of Competition Director Ian Conner hailed the ruling as a win that will maintain a free market for thermal coal.

"Peabody and Arch Coal's decision to abandon their joint venture will preserve competition in the market for thermal coal, which is sold to power-generating utilities that provide electricity to millions of Americans," Conner said. "The joint venture likely would have raised the price of coal to the utilities, and ultimately to consumers."

What the ruling means for the pair of Powder River Basin powerhouse coal producers is more business as usual, which “is not good, that’s for sure,” he said.

“It’s not great news if you’re Arch and Peabody, that’s for sure,” he said. “It really puts a wrench in their plans because a lot of their planning was based on moving in this direction.”

That direction was to merge their Western coal mines under the same operation umbrella while also merging the neighboring North Antelope Rochelle, owned by Peabody, and Arch’s Black Thunder mines in southern Campbell County. It also would have included Peabody’s Rawhide and Caballo mines and Arch’s Coal Creek mine in Wyoming and two Colorado coal mines, Twentymile (Peabody) and West Elk (Arch).

Separately, NARM and Black Thunder are the nation’s top producing coal mines. 

Together as a single operation, the companies stood to realize tens of millions of dollars a year in efficiencies, according to their joint venture proposal filed in June 2019.

Under the terms of the joint venture, Peabody would have owned 66.5% of the new company and have operational control while Arch would have had 33.5%. It would have created an estimated $820 million in net value for the companies off the bat as well as streamlining operations to the tune of another $120 million in savings a year for a decade.

Arch and Peabody already control more than two-thirds of the overall coal production from the Powder River Basin, according to the federal Mine Safety and Health Administration. Their five PRB mines produced 182.4 million tons of coal in 2019, about 68% of the overall 293.5 million mined. NARM and Black Thunder alone produced 157.3 million tons, or nearly 59% of the basin’s output last year.

They also employ a proportional number of people. Overall, the companies employ 2,441 people, or about 60% of the 4,090 as of June 30 reported to MSHA.

That the companies won't appeal the ruling isn’t a surprise, Godby said. 

Historically large mergers like the one proposed in the joint venture haven’t fared well with appeals.

“Arch and Peabody could appeal, but typically in these sorts of cases … this pretty common the companies give up on the plan,” he said.

Although the state of Wyoming and Gov. Mark Gordon spoke out in favor of the joint venture, the court wasn’t persuaded.

“What this leaves us now is what we started with — four large suppliers, plus some smaller ones, competing for an ever-shrinking market,” Godby said, referencing the next largest PRB producers, Eagle Specialty Materials and Navajo Transitional Energy Co. “There’s no doubt this would’ve made Arch and Peabody more competitive.”

While the joint venture may have been the best solution for Peabody, Arch and the overall long-term future of coal production from the PRB, Tuesday’s decision also probably is being met with some relief by other basin coal companies.

“You can’t argue against the idea that this is a bad day for Arch and Peabody and probably not a great day for the Powder River Basin,” Godby said. “It underlines how bad conditions are when you need a merger like this to help overall current conditions in the basin.”

For other PRB coal producers, the decision “probably means they're breathing a sigh of relief they won’t have a mega-company to compete with,” he said.

The basin’s coal industry remains in the same boat it’s been in, he said. The math says the PRB already is overdue for contraction with plummeting production and the same number of mines competing for fewer customers. This year’s production is on pace to be 203 million tons, or about 24% less than 2019 and more than 52% less than the 426 million tons mined a decade ago.

With or without the joint venture, contraction is going to happen, Godby said. But it could make that transition much more smooth for the basin and Wyoming.

“What we really need here to firm up the industry is take some of that excess supply off the market,” he said. “Without this merger, that’s going to happen one way or another. It becomes more likely we'll see more failures and disorderly consolidation than orderly consolidation in the Powder River Basin.”

Other industry analysts agree.

Ben Nelson, vice president-senior credit officer and lead coal analyst for Moody’s Investors Service, said that without the joint venture, the outlook for PRB coal continues to be bleak.

“The U.S. District Court’s decision to uphold the FTC objection to the joint venture between Arch Resources and Peabody Energy is credit-negative for both companies,” Nelson said in a statement to the News Record. “We expect the Powder River Basin coal production region will remain under significant pressure in 2021 and at least a few coal mines in the region could close in the early 2020s.”