Arch Coal Inc. (ACI - Analyst Report) wrapped up the sale of its operating division, Canyon Fuel Company, LLC, to Bowie Resources, LLC. The sale will fetch the company approximately $423 million including working capital adjustments. Besides the cash proceeds, Arch Coal will enjoy a pre-tax gain of roughly $120 million in the third quarter of 2013.
The deal, announced in late Jun 2013, involves the divestiture of Sufco and Skyline longwall mines along with the Dugout Canyon mines. The list also comprises the sale of nearly 105 million tons of bituminous coal reserves. All of these properties are situated in Utah.
However, the company will retain the ownership of its West Elk mine in Colorado and maintain 300 million tons of bituminous coal in the reserve basket in Western Bituminous Region. These consist of the Saddleback Hills and Elk Mountain properties in southeastern Wyoming.
With the current softness in the coal market, major producers like Arch Coal have been streamlining their operations through cost control and disciplined capital expenditures. The Canyon Fuel sale was a strategic step to address the company’s long-term goal of focusing more on its profitable business platforms like the Appalachian mines rich in metallurgical (met) coal and low-cost thermal mines.
Arch Coal intends to bolster production at these mines to serve its domestic as well as foreign customers. The Utah divestment is projected to contribute to capital and administrative cost savings of above $200 million through the period 2014 to 2017. Moreover, the company anticipates its rearrangement measures to bring in an additional $10 million of administrative cost savings annually.
The proceeds from the transaction will also strengthen Arch Coal’s liquidity. Its Appalachian business is poised to benefit from the bullish global steel market fundamentals given the World Steel Association’s forecast of an approximate 3% rise in steel demand in 2013 and 2014. In addition, coal demand is expected to witness a 6.9% increase year over year in the second half of 2013.
However, persistent economic weakness in Europe (a prime importer of coal from the U.S.) and the cutback in coal project funding in the emerging countries by the World Bank will create oversupply thereby affecting international coal prices.
Arch Coal presently holds a Zacks Rank #3 (Hold). Other well-placed coal operators in the market are Zacks Ranked #1 (Strong Buy) Alliance Holdings GP, L.P. (AHGP - Snapshot Report), Alliance Resource Partners L.P. (ARLP - Snapshot Report) and Oxford Resource Partners, L.P. (OXF - Snapshot Report).