US coal miners Peabody and Arch Coal on Wednesday announced that they would combine their Powder River Basin (PRB) and Colorado assets in what they describe as a “highly synergistic” joint venture (JV) aimed at strengthening the competitiveness of coal against natural gas and renewables.

The JV was expected to unlock synergies with a pretax net present value of about $820-million, the NYSE-listed miners said, stating that the average JV synergies were projected to be about $120-million a year over the initial ten years.

Among other assets, the JV would combine two productive and adjacent US coal mines – Peabody's North Antelope Rochelle Mine (NARM) and Arch's Black Thunder mine, which share a property line of more than seven miles – into a single, lower-cost complex.

Aggregated synergies should enable the JV to significantly reduce costs “well beyond” what each company could achieve alone, according to a joint statement. The idea behind the JV was that a lower cost structure would enable coal to better compete against other energy sources for electricity generation.

"The Peabody/Arch joint venture is an extraordinary example of industrial logic targeted to strengthen the competitive position of our products and create significant value for multiple stakeholders in a low-cost combination with exceptional physical synergies," said Peabody president and CEO Glenn Kellow.

The announcement comes as the Environmental Protection Agency is set to unveil a new carbon emissions rule for the US power industry on Wednesday, which should give states more leeway in how they regulate emissions from power stations. The Clean Power Plan under the Obama administration had aimed to slash carbon emissions by a third by 2030, and would have forced utilities to shift away from coal. President Donald Trump promised to revive the coal industry and to restore mining jobs during his 2016 campaign.

“Peabody and Arch Coal’s decision to form a JV in the PRB will strengthen their business position and is credit positive, but demand for coal from this region will remain under pressure by utilities’ continued move toward natural gas and renewable energy," Moody's senior credit officer and lead US coal analyst Benjamin Nelson said.

A report by research firm BloombergNEF states that solar and wind will supply about 50% of the world’s electricity by 2050, with hydro, nuclear and other renewable energy resources providing another 21%. The research organisation argues that coal will be the biggest loser in the power sector, with its share of global generation falling from 37% to 12% by 2050.

Underpinning the combination, Peabody has the lowest-cost position among major PRB producers and Arch has some of the highest-quality coal in the PRB. 

Arch is contributing its low-cost, higher-margin West Elk mine that enhances Peabody's Twentymile mine in Colorado. Further PRB synergies were expected from the integration of the Caballo, Rawhide and Coal Creek mines. Together with NARM and Black Thunder, these assets represent five of the ten most productive mines in the US.

"For Peabody, the creation of the joint venture is a clear demonstration of the company's US thermal strategy to optimise our lowest-cost, highest-margin operations in a low-capital fashion to maximise cash generation," said Kellow.

Peabody and Arch will continue to operate the assets independently until closing of the transaction. In 2018, on a combined basis, the assets shipped 206.0-million tons of coal. The assets are operated by a workforce of about 3 300, with combined proven and probable reserves totalling 3.4-billion.

Arch CEO John W Eaves said that the JV should allow the companies to realise the full potential of their assets in the PRB and Colorado.

“The significant operating synergies will enhance the competitiveness of these assets and also enable us to continue to generate long-term, sustainable returns for our shareholders. We look forward to completing this transaction in a timely manner."The JV will be 66.5% owned by Peabody and 33.5% owned by Arch.  A five-member board of managers would govern the venture and each party would have voting rights in proportion to its ownership percentage. Peabody will manage the venture.