Arch Coal Inc. (ACI), one of the most indebted U.S. coal producers, agreed to sell three Utah mines from its most profitable division for $435 million as the company tries to cut costs amid falling coal prices.
The company will sell the Sufco, Skyline and Dugout Canyon mines and 105 million tons of reserves to closely held Bowie Resources LLC, Arch said in a statement today. Arch said it will record a $120 million pretax gain from the deal.
Arch has posted two straight net losses and its debt has risen after a slump in U.S. consumption of coal to generate electricity and a slowdown in demand for metallurgical coal used in steelmaking.
The transaction -- the largest U.S. coal acquisition since 2011, according to data compiled by Bloomberg -- will allow St. Louis-based Arch to focus on the most “value-enhancing” parts of its business, such as its lower-cost thermal coal operations and Appalachian metallurgical-coal mines, Chief Executive Officer John W. Eaves said in the statement.
Arch rose 5 percent to $3.78 in New York.
The company said the the three Utah mines have forecast 2013 earnings before interest, taxes, depreciation and amortization of $90 million. The price paid for them implies an Ebitda multiple of about 4.8, compared with the median multiple of 13 from four other U.S. coal-industry deals announced since 2009, according to data compiled by Bloomberg.
“We view this transaction as a bit of a double-edged sword for Arch,” Lucas Pipes, an analyst at Brean Capital LLC in New York, said in a note today. “While enhancing liquidity in this environment is a welcome reprieve, the company will be forgoing roughly one-fifth of its current Ebitda, according to our estimates.”
Bowie, based in Louisville, Kentucky, said in a separate statement it will own the mines in a joint venture with Galena Private Equity Resources Fund, a unit of Amsterdam-based commodity trader Trafigura Beheer BV. Trafigura will sell the venture’s coal production.
Bowie has arranged financing for the deal with Morgan Stanley and Deutsche Bank AG.
The four Utah and Colorado mines in Arch’s Western Bituminous division had an operating margin of $8.87 a ton last year, compared with 84 cents a ton at the company’s Powder River Basin mines and $2.25 at its Central Appalachian operations, according to Arch filings.
The Bowie deal will lead to more than $200 million in cumulative capital and administrative cost savings, Arch said. Its ratio of debt to Ebitda is 9.13, higher than any U.S. coal company with a market value of more than $250 million, according to data compiled by Bloomberg.
FBR Capital Markets & Co., Deutsche Bank and Bank of America Corp. are financial advisers to Arch on the deal and Simpson Thacher & Bartlett is the coal producer’s legal counsel. Morgan Stanley is Bowie’s financial adviser and Baker Botts LLP and Fultz Maddox Hovious & Dickens Plc are providing legal counsel.
To contact the editor responsible for this story: Simon Casey at email@example.com