Peabody Energy (NYSE: BTU), in a second bite at the apple, said May 18 that it has successfully leased 402 million tons of ultra-low-sulfur coal reserves adjacent to its North Antelope Rochelle mine in the Powder River Basin of Wyoming.
The company submitted the successful bid of $1.11 per mineable ton at a May 17 auction for control of the South Porcupine reserve area. The bid was entered in a sealed bid auction process conducted by the U.S. Bureau of Land Management. The company plans to incorporate the five-square-mile block into its mine plan for North Antelope Rochelle following a permitting process.
The South Porcupine tract was originally nominated for lease by Peabody in 2006. A second set of reserves – the North Porcupine area – is also contiguous to the mine and a lease auction is anticipated in the second quarter. Peabody sought these two tracts under one application, but BLM decided to split them up in case a competing bidder might be interested in one but not the other.
Peabody now controls 3.3 billion tons of Southern Powder River Basin coal reserves. North Antelope Rochelle is the largest and most productive coal mine in the world, shipping 109 million tons of the world’s cleanest coal in 2011. Peabody said it is well-positioned to serve long-term demand growth for Powder River Basin products in domestic and expanding Asian export markets.
The company emphasized the ultra-low-sulfur aspects of this coal because three mines in this area – North Antelope Rochelle, Cloud Peak Energy’s (NYSE: CLD) Antelope mine and the Black Thunder mine of Arch Coal (NYSE: ACI) – produce a particularly low-sulfur coal that is expected to get stronger demand as new air regulations for coal-fired power plants take effect.
BLM said May 18 that Peabody’s BTU Western Resources unit submitted a successful bid of $446,031,863.88 ($1.11 per mineable ton) for South Porcupine. The bid met or exceeded BLM’s secret estimate of the fair market value of the tract and was accepted. The 3,243.03-acre tract contains an estimated 401.83 million tons of mineable coal. BLM noted that Peabody was the lone bidder in this auction. There had been an outbreak last year of unusual competitive bidding at BLM coal lease auctions in Wyoming, but that wasn’t the case here.
Neither BLM nor Peabody officially mentioned this, but Peabody actually failed in a first auction to make fair market value for this reserve. South Porcupine was previously offered for sale on Feb. 29, but the lone bid for the tract of $361.7m, filed by BTU Western, was rejected for not meeting BLM’s secret estimate of the fair market value for this reserve.
South Porcupine consists of all reserves recoverable by surface mining methods in 3,243 acres of lands located about 1 to 4 miles north of the Campbell/Converse county line, adjacent and up to 2 miles east of the UP/BNSF Joint Line, and adjacent to the western and northern lease boundary of North Antelope Rochelle. The tract is adjacent to federal leases to the east and south as well as a state of Wyoming lease to the north, all controlled by Peabody. It is also adjacent to federal leases to the west across the Joint Line held by Cloud Peak for Antelope. The intervening Joint Line may have kept Cloud Peak out of this auction.
The South Porcupine tract contains surface mineable coal reserves in the Wyodak-Anderson coal zone currently being recovered in the adjacent, existing mines. On the tract, there are two mineable seams, the Wyodak-Anderson 1 (Anderson) and the Wyodak-Anderson 2 (Canyon), located in the southern portion of the tract that merge into a single seam in the northern portion. The total coal thickness averages about 77 feet with the shallower Anderson seam slightly thicker than the deeper Canyon seam where two seams occur. The two seams can be separated by as much as 80 feet of interburden. Overburden depths to the Anderson range from about 160 to 460 feet thick.
The tract contains an estimated 401.83 million tons of mineable coal, which is less than four years of coal at North Antelope Rochelle’s production rate of 109.1 million tons in 2011. The total mineable stripping ratio of the coal in bank cubic yards per ton is about 4.8:1. The South Porcupine coal is ranked as sub-bituminous C. The overall average quality on an as-received basis is 8,905 Btu/lb containing about 0.2% sulfur.
The $1.11 per ton that Peabody is paying for this coal is not the record, by the way. Arch Coal in December 2011 set the record for the South Hilight tract next to Black Thunder. Arch bid $1.35 per ton for the 1,977-acre South Hilight tract, which contains an estimated 222 million tons of minable coal reserves in Campbell County.
That $1.35 per ton topped the $1.10 per ton that Alpha Natural Resources (NYSE:ANR) paid in August 2011 in a BLM auction for the mid-Btu Caballo West coal tract in the Wyoming PRB. Alpha in that auction topped a competing bid from Peabody Energy, which had actually applied to lease the tract in the first place. Peabody’s losing bid for Caballo West was 98 cents per ton.