Peabody to pay $793.3m for new Powder River Basin coal reserve

The BTU Western Resources unit of Peabody Energy (NYSE: BTU) lodged a winning bid of $793.3m on June 28 for the North Porcupine coal reserve, located next to its North Antelope Rochelle mine in Wyoming, the largest coal mine in the U.S.

The U.S. Bureau of Land Management office in Wyoming said the Peabody bid of $793,270,310.80 worked out to $1.10 per mineable ton for this Powder River Basin coal. This bid, the only one offered in the auction, met or exceeded BLM’s secret estimate of the fair market value of the tract and was accepted by the agency. The fact this tract wasn’t next to one of the other, competing mines in the area made a competitive bid from an outside party unlikely.

The 6,364.28-acre North Porcupine tract contains an estimated 721.15 million tons of surface-mineable coal. This tract is adjacent to both the North Antelope Rochelle mine and Peabody’s undeveloped School Creek mine, BLM noted. The tract is also adjacent to additional unleased federal coal.

This is an expensive acquisition for Peabody, since it had to pay 20% of the $793.3m winning bid up front, then will need to pay 20% each year for the next four years. Peabody said June 27 it is trimming its overall capital budget for 2012 due to poor current coal markets, but that the PRB is the place to be due to factors like a continuing decline in production in competing Central Appalachia.

Peabody on May 17 had leased from BLM 402 million tons of ultra-low-sulfur coal reserves adjacent to North Antelope Rochelle in the South Porcupine tract. The company submitted the successful, lone bid of $1.11 per mineable ton for that tract. It had applied for North Porcupine and South Porcupine under one lease application, but BLM decided to split them up and hold two auctions in case an outside bidder was interested in one of the tracts but not both. Peabody failed to meet BLM’s secret estimate of fair market value for the South Porcupine reserve at a Feb. 29 auction, which triggered the need for the second auction on May 17.

Peabody says this adds to its leading PRB coal reserve position

Said Peabody in a June 29 statement about the June 28 lease sale and the one before it: “Peabody has successfully leased more than 1.1 billion tons of reserves adjacent to its North Antelope Rochelle Mine in recent months, and the company controls 4 billion tons of coal reserves in the region. Peabody is the market leader in the Powder River Basin as the largest producer and reserve holder. The company is well positioned to serve long-term demand growth for domestic needs and export markets.”

The North Porcupine tract contains surface mineable coal reserves in the Wyodak-Anderson coal zone currently being recovered in the adjacent, existing mine. The Wyodak-Anderson is the only mineable seam on the tract. The thickness ranges from about 69 feet in the east to about 96 feet in the west. Overburden depths range from about 196 to 430 feet thick. The tract contains an estimated 721,154,828 tons of mineable coal. The total mineable stripping ratio of the coal in bank cubic yards per ton is about 4:1. The North Porcupine coal is ranked as sub-bituminous C. The overall average quality on an as-received basis is 8,892 Btu/lb and 0.2% sulfur.

North Antelope Rochelle is the largest and most productive coal mine in the world, shipping 109 million tons of coal in 2011.

The $1.11 per ton that Peabody paid for South Porcupine is not the record, by the way. Arch Coal (NYSE: BTU) in December 2011 set the record for the South Hilight tract next to its Black Thunder mine, which is just north of the School Creek project area. 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.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.