Arch Coal (NYSE: ACI) has withdrawn a 2006 application filed by a predecessor, Kennecott Energy, for the 5,944-acre West Jacobs Ranch coal tract in the Wyoming end of the Powder River Basin.
The application covered 957 million tons of coal that was intended for Kennecott’s Jacobs Ranch mine. After the application was filed with the U.S. Bureau of Land Management, Arch bought the Jacobs Ranch mine and melded it into its neighboring Black Thunder mine. The lease application had been slowly wending its way through the BLM system, with the environmental review process being wrapped up in 2010.
Said a notation on the BLM website: “Application Requested to Be Withdrawn on September 19, 2014. Request to be withdrawn & case closed effective January 7, 2015.”
Said Arch spokesperson Logan Bonacorsi in a March 10 e-mail to GenerationHub: “The decision to withdraw the application was made after careful evaluation of our near-term needs and commitment to a prudent capital allocation strategy.”
A big factor in BLM leasing is that this tract would require bonus lease payments, with one fifth of the total to be paid at the time of the tract auction, and the rest to be paid in four annual installments after that point. The exact amount of the bonus payments would depend on auction results and BLM’s secret evaluation of the minimum bid value for a coal reserve like this. The last lease auction for Black Thunder coal reserves, the December 2011 sale of the South Hilight tract, went for $300 million, for 222.7 million tons, at an average of $1.35/ton. If that per-ton price held for West Jacobs Ranch, the bonus payments would total nearly $1.3 billion at a time when the coal industry is going through some very rough economic times.
Said Arch Coal’s Feb. 27 annual Form 10-K report about Black Thunder: “Black Thunder is a surface mining complex located on approximately 35,800 acres in Campbell County, Wyoming. The Black Thunder complex extracts steam coal from the Upper Wyodak and Main Wyodak seams. We control a significant portion of the coal reserves through federal and state leases. The Black Thunder mining complex had approximately 1.3 billion tons of proven and probable reserves at December 31, 2014. The air quality permit for the Black Thunder mine allows for the mining of coal at a rate of 190 million tons per year. Without the addition of more coal reserves, the current reserves could sustain current production levels until 2020 before annual output starts to significantly decline, although in practice production would drop in phases extending the ultimate mine life. Several large tracts of coal adjacent to the Black Thunder mining complex have been nominated for lease, and other potential large areas of unleased coal remain available for nomination by us or other mining operations. The U.S. Department of Interior Bureau of Land Management, which we refer to as the BLM, will determine if the tracts will be leased and, if so, the final boundaries of, and the coal tonnage for, these tracts.
“The Black Thunder mining complex currently consists of six active pit areas and three loadout facilities. We ship all of the coal raw to our customers via the Burlington Northern Santa Fe and Union Pacific railroads,” the Form 10-K added. “We do not process the coal mined at this complex. Each of the loadout facilities can load a 15,000-ton train in less than two hours.”
U.S. Mine Safety and Health Administration data shows that Black Thunder produced 101 million tons in 2014, after turning out 100.7 million tons in 2013. That made it the nation’s second-largest coal mine in both of those years, behind Peabody Energy‘s (NYSE: BTU) neighboring North Antelope Rochelle mine.
A warning in Arch Coal’s Form 10-K report, which on its face is fairly standard in financial filings, is relevant here. “At December 31, 2014, we had consolidated indebtedness of approximately $5.2 billion. We also have significant lease and royalty obligations. Our ability to satisfy our debt, lease and royalty obligations, and our ability to refinance our indebtedness, will depend upon our future operating performance. Our ability to satisfy our financial obligations may be adversely affected if we incur additional indebtedness in the future.”
The amount of indebtedness the company has incurred could have significant consequences, said the Form 10-K, such as on “new LBA acquisitions.” The acronym “LBA” means “lease by application,” and it is the term that BLM uses for federal coal lease applications like the now-terminated one for West Jacobs Ranch.