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Joint venture partners FirstEnergy Corp. (FE) and privately held Boich Companies, yesterday, included a third partner – Gunvor Group for ownership of the Signal Peak coal mine in Montana. The companies sold a one-third interest in the Signal Peak coal mine to a subsidiary of commodity trader Gunvor Group Ltd. for $400 million.

The proceeds from the sale were split between both FirstEnergy and Boich, with FirstEnergy receiving about $260 million and Boich getting the remaining $140 million. On the other hand, the transaction will also lower FirstEnergy’s debt by nearly $360 million due to deconsolidation and will result in an estimated gain of $390 million for FirstEnergy because its share of the asset was revalued higher.

FirstEnergy and Boich have jointly held Signal Peak ever since they bought it in 2008. Initially, FirstEnergy had bought a 45% interest in the mine for $125 million. Subsequently, in 2009, FirstEnergy increased its interest in the mine to 50% by further investing $8.5 million. 

Since 2008, operations at Signal Peak have been expanded, new equipment has been installed and a 35-mile rail spur to an existing Burlington Northern Santa Fe railway line was built. Presently, the Signal Peak operation is valued at over $1.5 billion, including debt.

The new joint venture deal calls for FirstEnergy and Boich transferring their interests in Signal Peak mine to Global Mining Holding Company LLC (Global Holding), a new holding company that will include various Signal Peak entities. Subsequently, FirstEnergy, Boich, and Gunvor Group will each own a one-third interest in Global Holding. 

Going forward, Signal Peak’s production is estimated to grow to nearly 15 million clean tons per year compared to the current production of 9 million tons. The production from the mine will be sold to its new partner Gunvor as well as other domestic and international customers. Following the deal, however, FirstEnergy said it has cut its coal purchase commitment made to Signal Peak to 2 million short tons each year from the current 7.5 million short tons.

Compared to typical eastern coal, Signal Peak produces stable, high-quality bituminous coal with about 50% lower sulfur and ash content.  In addition, it has lower mercury content and significantly higher heat value than sub-bituminous coal found in the nearby Powder River Basin (PRB), meaning higher kilowatt-hour production with significantly lower carbon dioxide emissions per megawatt. 

One key advantage that Gunvor Group brings to this venture is the ability to utilize its commodity trading relationships in such markets as Japan, China, Korea and Chile to sell more coal. Looking ahead, the privately-held trader hopes to increase the coal exports from this mine utilizing its Westshore Terminals in Vancouver, which is capable of holding up to 200,000 tons of coal.

Based in Akron, Ohio, FirstEnergy is involved in the generation, transmission, and distribution of electricity, and is also engaged in energy management and other energy-related services.

FirstEnergy currently retains a Zacks #3 Rank (short-term Hold rating). We maintain our long term Neutral recommendation on the stock. The company primarily competes with American Electric Power Co. Inc. (AEP) and Dominion Resources Inc. (D).

 
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