RAG Completes Sale to Peabody

Star-Tribune energy reporter

Apr 19, 2004 -- Gillette -- Peabody Energy this week completed the purchase of two RAG Coal International mines in Australia and another in Colorado, but it passed on two other RAG mines that were for sale in Wyoming.

Instead, RAG's Belle Ayr and Eagle Butte mines were snapped up by U.S. private equity firms Blackstone Group and First Reserve earlier this year. That deal is yet to be completed.

Dick Price, a coal analyst for Westminster Securities Corp., said Peabody likely passed on RAG's Wyoming operations because of the current regulatory scrutiny of consolidation and collusion among the major coal producers in the Powder River Basin.

Earlier this month, the Federal Trade Commission filed a lawsuit and took administrative action seeking to block Arch Coal Inc.'s proposed acquisition of fellow Powder River Basin competitor Triton Coal Co., claiming the consolidation would likely raise the risk of illegally coordinated production to drive up prices.

Price said that if Peabody were to add RAG's 42.6 million annual tons to its current 106.5 million annual tons in the basin, it would give Peabody 29 percent of the Powder River Basin market.

"That would bring a great deal of scrutiny," Price said.

Peabody spokesman Vic Svec said the company does not discuss acquisition strategies.

RAG's Eagle Butte and Belle Ayr mines each are located adjacent to Peabody mines, presenting many possible cost-saving 'synergies' that coal companies don't like to pass up. However, the bulk of Peabody's coal production in the basin is of the higher-valued 8800 British thermal heating unit (Btu) coal in the southern portion of the basin. Price said Peabody isn't missing out by passing on the RAG mines because it has ample opportunity to ramp up production at its own mines in the 8300 Btu to 8400 Btu areas of the basin.

"I would suspect it would be a better thing for them (Peabody) to expand their existing operations than acquiring another," Price said.

This week's $432 million deal between Peabody and RAG gives Peabody three highly profitable coal mines. Two are in Queensland, Australia, with a total annual production capacity of 13.5 million tons. Those mines serve Asian steel producers in a market that experienced a nearly 30 percent price increase in 2003.

The other is the Twentymile mine in Colorado, which is expected to produce 8 million annual tons of 'super-compliance' coal, serving electrical power generation markets in the Southwest, according to a Peabody news release.

"Peabody also has a memorandum of understanding to purchase RAG's 25.5 percent interest in the Paso Diablo Mine in Venezuela, a 6.5 million annual tons operation that exports coal to customers in North America and Europe," according to the release.

Peabody Energy is the world's largest private coal company, with 2003 sales of 203 million tons of coal and $2.8 billion in revenues, according to the release. Its coal products fuel approximately 9.8 percent of all U.S. electrical generation and nearly 2.5 percent of worldwide electricity generation.

In Wyoming, Peabody owns and operates the North Antelope Rochelle, Caballo and Rawhide coal mines -- all in the Powder River Basin.