Arch Coal's decision to purchase Rio Tinto PLC's Jacobs Ranch mine in the Powder River Basin of Wyoming for $761 million has prompted Standard & Poor's Rating Services to place Arch on CreditWatch with negative implications.
Arch intends to finance the transaction with a combination of internally generated cash flow from operations, borrowings under the company's $800 million revolving credit facility, and possibly other securities.
However, if the acquisition closes as currently proposed and market conditions remain in line with S&P's expectations, Credit Analysts Maurice Austin and Marie Shmaruk said they would lower the corporate credit rating for Arch from ‘BB' to ‘BB-.
The one notch downgrade would reflect our assessment that we consider the company's willingness to fund a large acquisition with debt to be aggressive in light of the uncertain global operating environment and currently unsettled credit markets, the analysts said. This is important because Arch's credit profile has only recently reached the level consistent with its ‘BB' rating, and this acquisition would weaken the company's credit measures.
Jacobs Ranch, located south of Gillette, Wyoming, mines steam coal and ships it to U.S. customers throughout the country. The operation has approximately 381 million tons of proven and probable reserves of coal as of December 31, 2008. The mine shipped 42.1 million tons of coal last year.