Peabody Energy and Arch Coal will combine two coal mines in the Powder River Basin of Wyoming into a single complex as part of a joint venture aimed at improving the companies' ability to compete with natural gas and renewable energy suppliers.

Arch Coal's Black Thunder Mine and Peabody Energy's North Antelope Rochelle Mine will be combined into a single, lower-cost complex, the companies say. The two mines currently share a seven-mile property line.

Three other Powder River Basin mines will be included in the project: the Caballo, Rawhide and Coal Creek mines. The companies say those operations have some of the best overburden-to-coal ratios in the world and, along with Black Thunder and the North Antelope Rochelle Mine, represent five of the 10 most productive coal mines in the United States.

Colorado assets will also be contributed to the joint venture.

"We are excited about this transaction's potential to enhance the value of Arch's top-tier thermal coal assets," Arch CEO John W. Eaves said in a news release. "This new joint venture should allow us to realize the full potential of our valuable assets in the Powder River Basin and Colorado and benefit our customers in the process. The significant operating synergies will enhance the competitiveness of these assets and also enable us to continue to generate long-term, sustainable returns for our shareholders."

The project will be operated by Peabody, which will own 66.5% of the joint venture. The remaining 33.5% will be owned by Arch Coal. The companies will share profits, capital requirements and cash distributions in proportion to those ownership percentages.

The two companies will appoint a five-person board of managers to control the project. Until the transaction -- which is subject to regulatory approval -- closes, the companies will continue to operate their assets independently.

Per the statement, Peabody has the lowest cost position among major Powder River Basin coal producers. Arch, meanwhile, has some of the basin's highest-quality coal.

"The Peabody/Arch joint venture is an extraordinary example of industrial logic targeted to strengthen the competitive position of our products and create significant value for multiple stakeholders in a low-cost combination with exceptional physical synergies," said Peabody President and Chief Executive Officer Glenn Kellow. "The transaction unites two strong, culturally aligned workforces with a commitment to core values such as safety and sustainability. We believe this joint venture allows us to offer enhanced products and security of supply for customers, increased value for shareholders, greater efficiencies for railroads, long-term opportunities for employees and strength for the communities in which we operate."

Among the Colorado assets involved is Arch's West Elk Mine, which enhances Peabody's Twentymile Mine.

The companies expect that their joint venture will significantly reduce costs beyond what either company could achieve on its own, thus enabling stronger competition against other energy sources for electricity generation.

Substantial benefits expected by the companies include:

  • Optimization of mine planning, sequencing and accessing otherwise isolated reserves;
  • Improved efficiencies in deployment of the combined equipment fleet;
  • More efficient procurement and warehousing;
  • Enhanced blending capabilities to more closely meet customer requirements;
  • Improved utilization of the combined rail loadout system and other rail efficiencies;
  • Reductions in long-term capital requirements; and
  • Leveraging of shared services.

"In addition to enhancing the competitiveness of our western thermal coal platform, this move represents an excellent fit with our well-defined strategy for long-term value creation and growth," Eaves said. "While we expect our thermal coal assets to contribute significantly to our overall financial performance well into the future, we plan to focus our future growth and all of our projected growth capital on our core coking coal segment. Earlier this year, we announced plans to develop a second, world-class, High-Vol A longwall mine on the Leer reserves in northern West Virginia, and will continue to evaluate additional investments on this 200-million-ton reserve base over time. Looking ahead, we anticipate continued, favorable market dynamics in global coking coal markets, and view our premier coking coal portfolio as the centerpiece of our strategy to drive exceptional, long-term returns."

The assets involved in the joint venture shipped a combined 206 million tons of coal last year, the companies say. They are currently staffed by roughly 3,300 people.

Proven and probable reserves at those mines totaled 3.4 billion tons as of Dec. 31, according to the statement.

The companies were set to hold a conference call to discuss details Wednesday morning.

More From K2 Radio