Arch Coal buys a stake in small Illinois mine operator

Thursday, August 3rd 2006

Six years after Arch Coal Inc. closed its last mine in Illinois, the company bought a minority stake in a small local producer to tap the growing demand for high-sulfur Midwest coal.

Arch on Wednesday said it got a one-third interest in Knight Hawk Coal of Percy, Ill., in exchange for $15 million and 30 million tons of coal reserves.

For Arch, the nation’s No. 2 coal producer, the deal’s symbolism is perhaps as important as the financial terms. The Creve Coeur-based company still owns 230 million tons of coal reserves in Illinois, but stopped mining in the state in December 1999 after clean-air laws prompted utilities to switch to low-sulfur coal from Wyoming’s Powder River Basin.

Today, tougher environmental rules are spurring power producers to invest in advanced pollution controls that will allow them to use Illinois coal, and industry analysts are predicting a comeback for the region’s coal industry.

“Knight Hawk is well-positioned for growth,” Arch Chief Executive Steven F. Leer said in a statement. “We expect Illinois Basin coal to play an increasingly vital role in U.S. energy markets, and we view this transaction as a first step for Arch in re-entering this important region.”

Arch spokeswoman Kim Link said the company doesn’t have any plans to open any of its own mines in Illinois — at least not yet.

Arch has said it may again look to operate in Illinois sometime after 2010, depending on the state of the coal markets.

Knight Hawk, founded in 1997, controls about 70 million tons of coal in Southern Illinois. The company expects to ship about 3 million tons in 2006 and to expand production to 5 million tons by 2008.

Selling a stake to Arch helps guarantee a stable source of reserves for Knight Hawk’s Prairie Eagle mine in Southern Illinois, and the cash will help the company repay debt, said Steve Carter, a 19-year Arch Coal employee who co-founded Knight Hawk.

Knight Hawk is developing a $30 million mine in Franklin County that’s expected to begin operation next spring and ultimately produce 2 million tons of coal a year, he said.