Arch to buy Triton Coal for US$364 million

Arch Coal (AC-N), the second-largest coal producer in the U.S., has signed an agreement to buy Vulcan Coal Holdings, which owns all of the equity of Triton Coal Company, for $364 million in cash.

Triton, the seventh-largest coal producer in the U.S., owns and operates two mines, North Rochelle and Buckskin, in Wyoming’s Powder River Basin.

Last year, Triton’s revenues were $289.2 million and the two mines produced a combined total of 42.2 million tons of coal, leaving a reserve base of about 744 million tons.

The two mines also come with a dragline, seven electric shovels and 24 trucks ranging in size from 190 tons to 320 tons.

“One of our principal growth strategies is to build upon our existing position in Wyoming’s Powder River Basin, which is the nation’s largest and fastest growing coal supply region,” says Steven Leer, Arch Coal’s president and CEO. “We view Triton as an ideal fit with our existing operations in the basin.”

North Rochelle is situated in the southernmost portion of the Powder River basin, near the town of Wright, Wyo., and adjacent to Arch’s existing Black Thunder coal mine, which the company acquired in 1998.

Both Black Thunder and North Rochelle are serviced by a joint rail line operated by the Union Pacific and Burlington Northern-Santa Fe (BNSF) railways, and Arch believes that optimizing the mining sequence and combining the equipment fleet and rail loadouts should deliver “significant benefits.”

Last year, North Rochelle produced 23.9 million tons of coal and ended the year with a reserve of 250 million tons.

Arch notes that North Rochelle possesses “one of the highest-quality reserve bases” in the Powder River Basin, with an average heat content of approximately 8800 BTU per lb. and a sulphur content of just over 0.5 lb. of sulphur dioxide per million BTU.

(Coal with a sulphur content of less than 1.2 lb. of sulphur dioxide per million BTU is characterized as “compliance” quality, which means that it meets the most stringent standards of the Clean Air Act.)

“Because of its extremely low sulphur content, North Rochelle’s output is regarded as highly desirable by many customers and earns a premium in the marketplace,” says Leer.

The Buckskin mine is situated near Gillette, Wyo., and is hooked into the BNSF rail system.

In 2002, Buckskin produced 18.3 million tons of 8,400-BTU, compliance-quality grade coal, and left a reserve base of 494 million tons.

“As demand for Powder River Basin coal grows, we expect 8,400-BTU coal to become increasingly attractive,” says Leer. “Buckskin provides us with a solid foundation of production and reserves from which to serve these growing needs.”

North Rochelle and Buckskin currently employ 287 and 195 people, and Arch expects to retain most of them. “We believe the men and women of Triton Coal will be a valuable addition to Arch Coal,” says Leer. “The sharing of skills, knowledge and ideas represents yet another synergy that should create value and make the combined company a stronger competitor in the future.”

The acquisition boosts Arch’s total reserves in the basin by about 50%, from 1.4 billion tons to 2.1 billion tons.

Arch also has subsidiary operations in West Virginia, Kentucky, Virginia, Wyoming, Colorado and Utah. Together, these operations provide the fuel for about 6% of the electricity generated in the United States.

Even with the acquisition, Arch remains a distant second to the largest coal producer in the U.S., Peabody Energy (BTU-N), which has 9 billion tons of coal reserves and produced 198 million tons of coal last year.

There have been a few more coal deals in recent weeks: In April, St. Louis-based Peabody acquired full control of Black Beauty Coal for US$90 million; and in late May, vulture fund Questor Management announced plans to buy two coal mines from U.S. Steel (X-N) for US$50 million.

In other news, Arch announced in May that its 65%-owned subsidiary Canyon Fuel Company will idle its Skyline coal mine in Carbon Cty., Utah, by the second quarter of 2004 owing to continuing weakness in the Utah coal market.

Skyline, which employs 215 people, produced 3.5 million tons of coal in 2002 and hosts reserves of 50 million tons of very low-sulphur, bituminous coal.

With production in the southern portion of the mine nearing an end, Canyon Fuel is being faced with initiating expensive development work in a new reserve area to the north in order to keep the mine operational.

“Without a solid portfolio of baseload contracts and evidence of an improving Utah coal market, we simply cannot justify such an investment at this time,” says Leer. “The mine could remain idle for a period of several years before resuming operation.”

Canyon Fuel operates two other underground longwall mines in Utah: Sufco in Sevier Cty., which employs 295 people and produces more than 7 million tons of coal annually; and Dugout Canyon in Carbon Cty., which employs 155 people and produces more than 3 million tons annually.

Canyon Fuel markets its coal to regional electrical utilities, as well as to a number of large industrial facilities in Utah, Nevada and California.