Arch Resources, Peabody Sink as Federal Judge Kills Joint Venture

In June of 2019, Peabody Energy Corp. (NYSE: BTU | BTU Price Prediction) and Arch Resources Inc. (NYSE: ARCH) announced the formation of a joint venture to cooperatively operate two coal mines in the Powder River Basin of Wyoming and Colorado. In February of this year, the Federal Trade Commission (FTC) filed suit in federal district court to block the agreement.

On Tuesday, Federal District Court Judge Sarah Pitlyk ruled that the FTC prevailed. In her ruling, Judge Pitlyk wrote “that there is a reasonable probability that the proposed joint venture will substantially impair competition in the market for Southern Powder River Basin coal.” A detailed opinion will follow a review by the parties who will then have until October 2 to propose redactions to the opinion before it is published.

Earlier this week, we noted the recent jump in the share prices of both Peabody and Arch as demand for thermal coal to generate electricity has been rising. Increased demand has driven up demand for natural gas that has, in turn, also turned higher. Coal-fired electricity generation is expected to account for about 20% of all U.S. electricity this year, rising to 22% in 2021.

In a statement, Peabody CEO Glenn Kellow said the company was “deeply disappointed” with the ruling but that the company will now focus on being the low-cost provider of Powder River Basin coal and the top competitor “against natural gas and subsidized renewables.”

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Arch took a slightly different approach. The company said the erstwhile partners have terminated the proposed joint venture and Arch will “aggressively [drive] forward with its strategic pivot towards steel and metallurgical markets and simultaneously [intensify] its pursuit of strategic alternatives for its thermal assets.”

Arch added that it plans to continue realigning its production rate for thermal coal with declining domestic demand, adjusting operations to “minimize future cash requirements,” and streamlining the company to reflect its “long-term strategic direction.” That sounds like job cuts are coming and likely quite soon.

Perhaps the implications of Arch’s announcement explain why its shares are down about two thirds less than Peabody’s. Add to that serious doubts concerning the longevity of the company’s annual dividend of $0.58 (currently yielding an eye-popping17.8%).

Shares of Peabody have lost more than 21% to trade at around $2.46, near the bottom of the 52-week range of $2.27 to $16.75. Shares closed Monday at $3.92.

Arch’s shares are down about 7.2% at $43.31 in a 52-week range of $21.80 to $89.42. Arch has suspended dividend payments. The stock closed at $50.79 on Monday.

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