Coal's Boom Puts Focus on Buyouts and Powder River

A Chinese group and Alcoa today announced they've made a $14 billion investment in Rio Tinto, an international mining group with three of its most productive coal mines (Cordero Rojo, Jacobs Ranch, and Antelope) operating in the western U.S. Powder River Basin, a key source of coal for U.S. energy needs. Rio Tinto already has rejected what would be the biggest corporate takeover in history, a $127 billion all-stock offer from another giant commodities producer, BHP Billiton. Chinalco (Aluminum Corp of China) and Alcoa may bid for control of Rio themselves or may be buying in to ensure their own supplies during a period of booming demand for commodities around the world.

Arch Coal, which released its 2007 financial results this morning and has two major mines in the Powder River Basin, said it sold 99.1 million tons of coal from its basin operations in FY07, up from 96.2 million tons in FY06. The company mined and sold far less coal from its Central Appalachia operation, with only 13.9 million tons sold, but that coal is worth four times as much. Appalachia coal sold for an average price of $48.96 per ton in FY07 versus $10.59 per ton for Powder River coal, according to Arch's earnings release. FY97 was the second-best year of earnings, with $174.7 million in net earnings, in Arch's 10-year history as a public corporation, Chairman/CEO Steve F. Leer said. The company also said it estimates U.S. coal exports grew by close 10 million tons in 2007 and will grow by another 20 million tons in 2008. Additionally, 14 gigawatts of coal-fueled capacity are under construction in the United States, representing an additional 50 million tons of new annual coal demand, with half of these expected to start up before the end of 2009. Another 8 gigawatts, representing 30 million tons of added annual coal demand, are in advanced stages of development, Arch said.

In terms of safety, Arch said its FY07 total incident rate was 2.5 times better than the national coal industry average and was the second-best year for safety in its history.

Rio Tinto Chairman Paul Skinner today said of the Chinalco/Alcoa investment, "This unsolicited development, of which we had no prior notice, reinforces our view of the long term value of Rio Tinto. In line with our long standing strategy, we shall continue to focus on operating our many world class assets to maximize value and prospects for all shareholders."

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