Arch Coal (NYSE: ACI) and Colorado coal producer Bowie Resources LLC said June 28 that they have entered into a definitive agreement under which Arch will sell to Bowie its wholly-owned subsidiary, Canyon Fuel Co. LLC, which has three coal mines in Utah.
The sale is for $435m in cash, subject to customary adjustments for working capital and other items. Both companies have approved the transaction, which is expected to close in the third quarter of 2013.
“The sale of our Utah operations is consistent with our previously announced plan to unlock value for our shareholders by divesting certain non-core thermal coal assets,” said John Eaves, Arch’s president and CEO. “As part of our strategy, we have been diligently focused on optimizing our asset base, expanding our coal export network, reducing our discretionary capital spending and re-aligning our portfolio for growth. With this transaction, we’re delivering on a number of these initiatives while also enhancing our financial flexibility.”
Canyon Fuel includes the Sufco and Skyline longwall mines and the Dugout Canyon continuous miner operation (which up until recently had its own longwall), all located in Utah. In addition to these active operations and related support facilities, Bowie will receive about 105 million tons of bituminous coal reserves in Utah. After the transaction is completed, Bowie plans to keep the existing 725-person workforce in place at the Canyon Fuel operations. Canyon Fuel, which is basically assets that Arch bought years ago from Coastal Coal, is Utah’s largest coal producer.
“From the inception of our ownership of Bowie, our goal has been to establish a core business rooted in the Western Bituminous Region and to grow it, not only organically but with synergistic acquisitions,” said John Siegel, a principal owner of Bowie. “In that context, it would be hard to imagine a more logical next step in our evolution than the purchase of these superior Canyon Fuel mines.”
“The divestiture of Canyon Fuel will streamline Arch’s mine portfolio and allow us to focus on the most value-enhancing parts of our business, such as building out and upgrading our Appalachian metallurgical coal platform and optimizing our low-cost thermal coal franchise to serve the domestic and export coal markets,” said Eaves. “Our Utah operations have generated more than $600 million in free cash flow for Arch since 1998 and have created significant value for our company. But we believe that monetizing these assets now, before investing meaningful additional capital, is the right course of action for our shareholders.”
Arch will keep West Elk longwall mine in Colorado
Arch will retain its West Elk longwall mine in Colorado and approximately 300 million tons of coal reserves in the Western Bituminous Region, including bituminous reserves located in southern Wyoming. The company controls a large, longwall-capable reserve in southern Wyoming that is the proposed site of a long-stalled coal gasification project.
In 2012, the West Elk mine sold 6.7 million tons of high-quality, low-sulfur coal, of which roughly 40% was shipped into the seaborne thermal market. “West Elk is a valuable, low-cost asset with a broad market reach that includes customers in the eastern and western United States and in the international arena,” said Paul Lang, Arch’s executive vice president and COO.
Eaves said Arch’s ample cash balance positions the company for future debt reduction as coal markets improve. “As a result of the sale of its Utah operations, Arch expects to achieve cumulative capital and administrative cost savings of more than $200 million from 2014 through 2017,” he added. “These expected future savings, which primarily represent capital spending to sustain current production levels, should further enhance Arch’s liquidity position.”
Upon completion of the transaction, Arch will receive cash proceeds of $435m before adjustments and will recognize a pre-tax gain of approximately $120m related to the sale of Canyon Fuel.
In 2013, Arch forecasted that Canyon Fuel would sell around 9 million tons of coal, primarily to regional power producers and domestic industrial facilities in Utah, Nevada and California. A major customer is PacifiCorp. Based on such sales, Canyon Fuel was projected to generate pro forma EBITDA of roughly $90m, with planned capital expenditures of $15m to $20m, in 2013.
“Bowie has a long operating history in the Western Bituminous Region,” said Eaves. “Bowie also has deep knowledge and experience in serving the region’s customer base, and is well positioned to manage the opportunities and challenges associated with mining in Utah.”
Bowie obtains outside financing for this buy
Bowie has obtained a committed financing arrangement, led by Morgan Stanley Senior Funding Inc. and Deutsche Bank AG New York Branch, to fund the transaction. Galena Private Equity Resources Fund will provide a cash investment to acquire a minority equity stake in Bowie. Consummation of the transaction is subject to certain governmental and regulatory conditions and approvals and other customary conditions.
FBR Capital Markets & Co. and Deutsche Bank are acting as financial advisors to Arch for the transaction, Bank of America Merrill Lynch is providing certain financial advisory services to Arch, and Simpson Thacher & Bartlett is providing legal counsel to Arch.
Morgan Stanley & Co. LLC is acting as the financial advisor to Bowie, and Baker Botts LLP and Fultz Maddox Hovious & Dickens PLC are providing legal counsel to Bowie.
Bowie Resources is a privately owned coal company with headquarters in Louisville, Ky. Bowie operates the Bowie #2 longwall mine, located near Paonia, Colo., which it bought several years ago from a company founded by coal operator Larry Addington. Since then, Bowie has been working to get the Bowie #2 mine out of an area of bad geology that slashed production and to get the mine back up to its old production levels.
Galena Asset Management was formed in 2003 and is a wholly owned subsidiary of commodities trader Trafigura Beheer BV, with over $2.5bn in managed assets
Bowie says this deal adds to growing coal position
Bowie Resources LLC and Galena Private Equity Resource Fund, managed by Galena Asset Management, have created a joint venture. The new company will bring together the equity owners of Bowie with Galena to purchase Canyon Fuel from Arch Coal. The new company, Bowie Resource Partners LLC (BRP) will own the Bowie #2 and Canyon Fuel mines and will be based in Louisville, Ky., with a regional office in Grand Junction, Colo. BRP will have an annual productive capacity of 15 million–17 million tons of thermal coal and a workforce of 1,100 employees. Trafigura AG will be the exclusive marketing agent for all of BRP’s production.
“From the beginning with Bowie, our goal has been to establish a core business rooted in the Western Bituminous Region and to grow organically as well as with specifically targeted synergistic acquisitions. We see this as an opportune time to position ourselves, with very selective mining and transportation assets, to be out in front of an anticipated renewed global interest in Western US coal,” said John Siegel, Chairman of BRP. “The exemplary safety and productivity record of Canyon Fuel, the company’s long term relationships with its cornerstone domestic customers, and the superior quality and geology of its reserves, in conjunction with our recent development of significant West Coast export throughput capacity, combine to make this an extraordinary acquisition for us.”
The Galena Private Equity Resource Fund was created in 2012 to invest in equity and debt of small- to medium-sized metals and mining companies in a development or expansion phase. The fund will make a cash equity investment of $104m in BRP to acquire a significant minority stake in the joint venture company.
“Galena has built an impressive record of prudently selecting high performing investments,” said Jeremy Weir, CEO of Galena Asset Management. “We believe that Bowie Resource Partners has a unique opportunity to reshape the Western US coal paradigm.”
This deal adds to existing position, including refined coal plants
Bowie #2 is a 5 million ton per year longwall operation located in Paonia, Colo., that opened in 1998, and was purchased by a group headed by John Siegel and Steve Rickmeier in July 2009. Sixty percent of Bowie’s production and remaining reserves are committed to the Tennessee Valley Authority under a long-term favorably priced contract, Bowie Resources said. Bowie #2 has a state-of-the-art 650 ton per hour (TPH) heavy-media wash plant, a 115-car unit train loadout facility, and produces “super-compliance” bituminous coal. Bowie has 325 employees and, like Canyon Fuel, has consistently ranked in the top ten most productive and safest longwall operations in the US.
Bowie has a long-term agreement with Metropolitan Stevedore Co. for the Port of Stockton, which will provide BRP with the opportunity to ship up to 2.3 million tons annually, as the Metro Ports/Stockton agreement will be assigned by Bowie to BRP. Separately, Bowie has been in negotiations with Levin Richmond Terminal Corp. for the port of Richmond, which would provide BRP with annual “topping off” capacity of an additional 1.2 million tons. Bowie has also signed a Letter of Intent for significant export capacity via a Pacific port in the Northwestern U.S., which would also be assigned to BRP.
“We think the time is right to introduce the new ‘Bowie Brand’ into markets where the need and appetite for coal-fired power generation is growing, not abating. In that regard, we are excited to have the opportunity to take advantage of (our marketing partner) Trafigura’s global coal sales platform,” Siegel added.
In January 2013, principals of Bowie formed Bowie Refined Coal LLC to purchase ten Refined Coal Facilities from Headwaters Inc. of Salt Lake City, Utah. The facilities were built in 2007 and 2008 at an estimated cost in excess of $120m. The facilities refine coal waste into a salable product. The annual productive capacity of 6 million tons makes Bowie Refined Coal one of the largest independent processors of waste coal in the U.S., Bowie said. The Bowie Refined Coal product is an extremely low cost component when either blended with run-of-mine coal or sold directly to coal consumers, Bowie noted.
Principals of Bowie also own a controlling interest in ClearStack Power LLC, which is a pre-combustion clean coal technology company with patented technologies that achieve SO2, NOx, particulate and mercury reductions in coal-fired generating units. ClearStack is partially owned by principals of Energy Venture Analysis of Arlington, Va., and Sterling Energy of Munster, Ind.