UPDATE 2-Arch Coal sells Utah operations for $435 million

Fri Jun 28, 2013 11:25am EDT

* Bowie, Galena form joint venture to purchase assets

* Trafigura will market coal from new company

* Purchase matches 2011 move by rival Gunvor (Adds bullets, detail on Trafigura role, share price jump)

TORONTO/GENEVA, June 28 (Reuters) - Arch Coal Inc said on Friday it had sold a group of thermal coal mines in Utah to privately held Bowie Resources for $435 million as it looks to build its metallurgical coal business and focus on lower-cost thermal operations.

A new joint venture between Bowie and commodity trader Trafigura's hedge fund unit Galena will take over Arch's wholly-owned subsidiary Canyon Fuel Co, including the Sufco, Skywall and Dugout Canyon thermal coal mines in Utah.

Canyon Fuel has 725 employees.

Trafigura will have exclusive marketing rights for the joint venture Bowie Resource Partners (BRP), which will have annual production capacity of 15-17 million tonnes of thermal coal and a workforce of 1,100, it said.

Galena's Private Equity Resource Fund will be a minority shareholder, committing $104 million to the new company.

"Altogether, we view this transaction as a bit of a double-edged sword for Arch," Brean Capital analyst Lucas Pipes wrote in a note to clients. The deal will boost Arch's liquidity but could cut its earnings before interest, taxes, depreciation and amortization by about 20 percent, he said.

Arch said the sale would allow it to focus on upgrading its metallurgical coal business in Appalachia and "optimizing" its thermal coal franchise. The company will hold onto other thermal mines, including West Elk in Colorado, which exported some 40 percent of the 6.7 million short tons it sold in 2012.

Metallurgical coal is used in making steel, while thermal coal is used in power generation.

Cheap natural gas, paired with the threat of new environmental regulations that could hit coal demand, has clouded the prospects of operations like Canyon Fuel that sell to regional utilities and industrial customers.

COAL TRADING

Switzerland's Trafigura - the world's third biggest trader in raw materials with global assets worth $4.8 billion at the end of last year - began coal trading in 2009.

The purchase will pit Trafigura against rival Gunvor, which has also begun trading coal in the past few years and acquired U.S. coal assets when it bought a minority stake in Signal Peak in 2011.

"We see this as an opportune time to position ourselves, with very selective mining and transportation assets, to be out in front of an anticipated renewed global interest in Western U.S. coal," said Bowie Resource Partners chairman John J. Siegel said in a statement.

The deal is expected to close in the third quarter.

FBR Capital Markets & Co and Deutsche Bank are acting as financial advisers to Arch, while Morgan Stanley & Co is acting as the financial adviser to Bowie.

Arch shares were up 5.0 percent on the day to $3.78 on the New York Stock Exchange. (Reporting by Julie Gordon and Allison Martell in Toronto and Emma Farge and Tom Miles in Geneva; Editing by John Wallace and Patrick Graham)

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