A federal judge has ruled against a proposed joint venture between the two largest coal producers in the nation. District Judge Sarah Pitlyk found that consolidating seven of Arch Resources Inc. and Peabody Energy Corp's mines in the Powder River Basin and Colorado wouldn't bode well for the region's market.
The move leaves questions for future consolidation in the Powder River Basin, and Arch Resources which has taken steps to move away from thermal markets.
The court decision comes in support of a previous complaint made by the Federal Trade Commission last February.
"The FTC has shown that there is a reasonable probability that the proposed joint venture will substantially impair competition in the market for Southern Powder River Basin coal and that the equities weigh in favor of injunctive relief," Pitlyk wrote.
The companies won't appeal the federal court's decision given the significant investment required.
In June of 2019, Peabody and Arch announced their intent of joining forces in hopes of saving $820 million over the course of a decade. The goal was to adjust as coal markets continued to struggle against increasingly competitive natural gas and renewables.
"It will create a stable, durable supply platform for our thermal customers even as we continue our organizational pivot towards global metallurgical markets," said John W. Eaves, former Arch Chief Executive Officer in a February press release.
Under the plan, Peabody would have become the majority of the economic interest. In a presentation, Arch said it would use its thermal revenue to fund its metallurgical investments. The company officially changed their name from Arch Coal to Arch Resources in May.
During an earnings call, Paul Lang, Arch President and CEO, said in July that the company had already cut $100 from Black Thunder, it's largest mine in Wyoming. If the joint venture didn't go through, it might make similar moves.
"Those are the type of things we're looking at, but my guess is, it's going to be a much smaller footprint going forward," Lang said.
Andy Blumenfeld, market analytics head at IHS Markit, posited what that could look like.
"It certainly appears that they'll probably… they'll continue to operate Black Thunder, but probably wind down as much as they can and make sure that they cover as much as their final reclamation liabilities that they have," he said.
Blumenfeld said it's unlikely to see any new coal permitted or new investment at this point.
Glenn Kellow, Peabody President and CEO, said he's deeply disappointed with the court's decision.
"Our focus now is on continuing to be the low-cost PRB coal provider to best compete against natural gas and subsidized renewables. We remain committed to ensuring our customers continue to have access to a reliable and affordable fuel source," he said.
Blumenfeld said the decision will have broader impacts across the Powder River Basin as well.
"I think right now, the pathway is basically: wind down what they have and try to keep these mines moving with market demand," he said.
Benjamin Nelson, VP Senior Credit Officer and lead coal analyst at Moody's Investors Service said, "We expect the Powder River Basin coal production region will remain under significant pressure in 2021 and at least a few coal mines in the region could close in the early 2020s."
According to the U.S. Energy Information Administration, year-to-date coal production in the U.S. is down 26 percent from the same period in 2019.
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