Monday, coal producer Arch Coal, Inc. (ACI) said it has agreed to buy Jacobs Ranch mine in the Powder River Basin of Wyoming from UK-based mining giant Rio Tinto (RTP, RIO.L, RIO.AX) for a total cash consideration of US$761 million. The deal, approved by both companies' Boards, is subject to customary closing conditions, including regulatory approvals.
As part of the deal, Arch Coal will buy Jacobs Ranch's low-cost coal reserves of 381 million tons, as of December 31, 2008, that are contiguous to Arch Coal's Black Thunder mine, together with a high-speed rail loadout, a recently added overland conveyor and near-pit crushing system, and strong customer commitments. The purchase also includes an expansive fleet of highly efficient mining equipment, including a 120-cubic-yard dragline, eight large electric shovels, and more than 40 large haul trucks, all of which complement the existing equipment at Black Thunder.
According to St. Louis-based Arch Coal, which supplies cleaner-burning, low-sulfur coal to fuel roughly 6% of the nation's electricity, the acquisition of Jacobs Ranch and the subsequent integration into its Black Thunder mine will expand its already low-cost position in the Powder River Basin, which is America's largest and fastest growing coal supply region.
In a separate statement, Rio Tinto, the mining group combining UK-based Rio Tinto plc and Australia-based Rio Tinto Ltd, noted that its plan to sell the mine is part of its November 2007 decision to divest Rio Tinto Energy America, or RTEA, a business unit that operates US coal mines mainly in the Powder River Basin of Wyoming and Montana, including Jacobs Ranch. The company noted that the process of divesting RTEA, which will remain one of the largest coal producers in the U.S. following the Jacobs Ranch deal, will continue.
Jacobs Ranch, which mines steam coal with a workforce of more than 600 people, is located south of Gillette, Wyoming and is served by the joint rail line in the Powder River Basin. Arch Coal said that, like Black Thunder, Jacobs Ranch can ship its output to a broad and geographically diverse customer base. The mine also has the benefit of competitive mining costs due to the thickness of the region's coal seam and the proximity of the seam to the surface.
Arch Coal noted that nearly 100% of Jacobs Ranch's projected production for 2009 is committed and priced under existing sales contracts. In addition, more than 75% of the mine's projected 2010 production, and nearly 50% of its 2011 production, is committed and priced.
In 2008, the mine produced 42.1 million tons of high-quality sub-bituminous coal for sale to power generators located throughout the United States. Upon integration, the combined Black Thunder complex will have three loadouts, capable of loading four trains simultaneously, and 22 train landing spots.
Commenting on the deal, Steven Leer, Arch's chairman and chief executive officer, stated, "Jacobs Ranch represents an excellent strategic fit with Arch's existing assets in the Powder River Basin. The integration of Jacobs Ranch into the Black Thunder mine will create one of the world's largest and most efficient mining complexes. Because Jacobs Ranch and Black Thunder share approximately six miles of property line, the combination is expected to create significant operating synergies."
On a pro forma basis, assuming an acquisition closing date of December 31, 2008, Arch Coal's reserves in the Powder River Basin would increase to 2.1 billion tons and its total reserve base across all regions would increase to 3.2 billion tons. According to the company, Jacobs Ranch's existing reserve base has an average heat content of more than 8,800 Btus per pound, and a sulfur-dioxide content of less than one pound per million Btus.
Also, on a pro forma basis, Arch Coal estimates that the addition of Jacobs Ranch would result in incremental EBITDA of between $145 million and $165 million for the company in 2009. In 2008, the mine's pro forma EBITDA was about $73 million. Roughly two-thirds of the expected incremental EBITDA contribution derives from pricing on already committed tons. Arch Coal also may identify further cost reduction opportunities following the integration of the two mines to one operating complex.
With the transaction, Arch Coal expects operating synergies related to the optimization of the combined equipment fleet, together with higher utilization of an expanded coal handling system and a loadout, greater flexibility in product blending and quality control, more efficient inventory management, lower net capital expenditures, and purchasing efficiencies.
Arch Coal noted that it currently expects to finance the deal with a combination of internally generated cash flow from operations, borrowings under the company's $800 million revolving credit facility and possibly other debt instruments.
Guy Elliott, chief financial officer, Rio Tinto, stated, "The sale of Jacobs Ranch is a further illustration of the high quality of our assets and the strong value we are able to obtain for shareholders. This brings the total asset sales announced this year to US$2.5 billion."
Rio Tinto realized almost US$3 billion from asset sales during 2008, comprising the Greens Creek mine in Alaska for US$750 million, its interest in the Cortez operation in Nevada for US$1.695 billion and the Kintyre uranium project in Western Australia for US$495 million. The company also announced the divestment of its interest in the Ningxia aluminum smelter in China for US$125 million, and its potash assets and Brazilian iron ore operation for US$1.6 billion in January 2009.
In mid-February, Rio Tinto announced a US$19.5 billion worth strategic partnership with Aluminium Corporation of China, or Chinalco, through the creation of joint ventures in aluminium, copper, and iron ore as well as the issue of convertible bonds to Chinalco.
In the Jacobs Ranch deal, Citi is acting as lead financial advisor to Arch Coal, while Merrill Lynch & Co. is providing certain financial advisory services and Bryan Cave LLP is acting as the legal advisor.
Credit Suisse advised Rio Tinto on the transaction.
ACI closed Friday's regular trading session at $12.53, down $0.16 or 1.26%, on a volume of 6.6 million shares.
RTP settled at $102.45 on Friday, up $5.51 or 5.68%, on a volume of 985 thousand shares. RIO.L closed Friday's trading at 1,825 pence, up 92 pence or 5.31%, on a volume of 7 million shares.
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