Arch Mineral Corporation Business Information, Profile, and History

History of Arch Mineral Corporation

Arch Mineral Corporation is a private coal company owned in equal parts by Ashland Oil Company and the Hunt family. From its headquarters in the St. Louis, Missouri, suburb of Creve Coeur, it oversees a nearly completely decentralized system of mines in Wyoming, Illinois, Alabama, Virginia, West Virginia, and Kentucky.

Arch was founded in 1969 by Merl Kelce, with backing from Ashland Oil. In 1955 Kelce and his brothers had merged their family-owned Sinclair Coal Company into the larger Peabody Coal Company. They gained operating control of Peabody and in succeeding years built it into the industry's leader. Eventually becoming tired of running a huge organization, the brothers decided in the mid-1960s to sell out.

Merl Kelce tried to sell the company to Ashland Oil but then, in 1968, came to terms with Kennecott Copper. The Kelce family received &Dollar;58 million of the &Dollar;585 million purchase price, and Merl Kelce himself received approximately &Dollar;33 million.

Following his involvement with Peabody, Merl Kelce remained interested in coal. Early in 1969 he and longtime associate William "Guy" Heckman formed Sinclair Associates to make selected coal investments. They set up offices in St. Louis and brought in Huber t Hagen, another former employee, to seek possible acquisitions in the West.

Around the same time, Ashland Oil's chief executive officer, Orin Atkins, and his special assistant, Buck Weaver, visited Kelce and asked him to help Ashland evaluate a possible acquisition, Ayshire Collieries. Kelce was not interested in that type of business but told Atkins and Weaver about his ambition to build a new coal company. The three men discussed a possible partnership and after negotiations, agreed to form a new company with a capital layout of &Dollar;10 million. Ashland and Kelce each would receive 50 percent of the stock, though Ashland would put up &Dollar;7.5 million, or 75 percent of the money.

Even before Arch Mineral was officially incorporated on June 20, 1969, Kelce began looking in the West for low-sulfur coal. e believed that low-sulfur western coal--previously untouched because of transportation costs--would become profitable as environmental concerns were felt in the marketplace. With this in view, he decided to try to obtain western coal rights held by the Union Pacific Railroad.

Kelce had several projects in mind, but Arch's &Dollar;10 million in capital was not nearly enough to finance them. Arch had no assets, and banks were reluctant to loan Kelce the money. He eventually obtained a form of collateral through the Tennessee Valley Authority (TVA), which like other power producers, was worried about the availability of coal in coming years. Agreeing to buy coal from Arch, TVA head Jim Watson produced a letter of intent that Kelce in turn used to get a &Dollar;10 million loan from Citibank of New York.

With the loaned money Kelce bought a mine in Fabius, Alabama, and initiated purchases of a coal preparation plant, reserves in southern Illinois, and draglines from the Marion Power Shovel Company. These moves required further capital from Ashland, which might have balked had it not been for the strong support of Atkins and Weaver.

By May of 1970 Merl Kelce had gotten Arch firmly under way. The fledgling company's success, however, was by no means assured, and perhaps nothing could have been more threatening to it than the sudden death of Arch's founder. On May 9, 1970, Kelce learned he had colon cancer; he died three days later.

The management of Arch was left to Heckman, who had the support of Ashland's Atkins. Heckman was a financial man who did not fit the typical up-from-the-mine chief executive officer profile that was common in the coal industry. Nevertheless, he was able to close several complex deals, many of which were already in the works when Kelce died.

With some difficulty, Heckman purchased a Corona, Alabama, coal reserve, signed a contract to supply Georgia Power, and, in exchange for an Arch commitment to supply coal to the government-owned utility, persuaded the TVA to guarantee the &Dollar;24.5 million in bonds Arch used to purchase the Fabius facility.

Heckman also pursued Kelce's western strategy. In partnership with Kansas Power & Light, he bid on and won mineral rights in the Hanna Basin of Wyoming. Unfortunately, these rights formed a kind of checkerboard with rights held by the Rocky Mountain Energy Company, a Union Pacific Railroad subsidiary. Arch and Kansas tried to lease Rocky Mountain's land, but after complex negotiations in which Rocky Mountain Energy essentially attempted to muscle its way into mining the area, Kansas Power dropped out of the venture.

Into this breach stepped the Hunt brothers, who were looking to broaden their holdings from a base in oil. As a condition of their involvement, the Hunts demanded a 50 percent share of the company. Both Heckman and Atkins agreed. The Hunts acquired the Kelce shares, and Arch issued enough new shares to equalize the Hunt holdings with those of Ashland. Key employees such as Heckman and David Kelce also retained small but significant holdings.

With the Hunts behind them and a commitment from Commonwealth Edison to buy the western coal, Heckman obtained financing from Citibank and the First National Bank of St. Louis and began work on the Seminoe I and Seminoe II mines in Wyoming. In June of 1971 Heckman wrote a memo to Herbert Hunt and Ashland's Buck Weaver suggesting the possible availability of Southwestern Illinois Coal Company. Southwestern's high-sulfur reserves were huge and it had long-term, low-priced contracts with Commonwealth Edison. A consulting report estimated Southwestern's worth at &Dollar;54 million--several times that of Arch, but not too much for Ashland and the Hunts. The question was whether or not Arch could operate Southwestern's Captain mine efficiently enough to profit off such an acquisition.

Heckman, Atkins, and the Hunts decided Southwestern could be profitable, and on April 11, 1972, they bid more than &Dollar;58 million to narrowly win Southwestern. "With this purchase," Atkins wrote to Ashland's directors, as cited in Buried Treasure, "Arch will be producing in excess of 12 million tons of coal a year, with the potential of moving into the range of 14-15 million tons. This will place it among the top ten coal companies in the country." In fact, the Captain mine served for many years as the company's flagship operation.

At this point--though work was underway on Seminoe I and II--Arch's Hanna Basin holdings were not all in use. Construction of a third mine was being held up by Rocky Mountain Energy, which was demanding terms in exchange for involvement. Rocky Mountain had a great deal of leverage, since Arch would have to drill in a less profitable checkerboard pattern without its land. Rocky Mountain also needed Arch, since it too would be stuck with checkerboard holdings without a deal.

Heckman decided to drill and see if Rocky Mountain would come around. And, just as Heckman ordered equipment onto the land early in November of 1972, Rocky Mountain's John Kelly agreed to terms. Arch and Rocky Mountain would create a joint venture called Medicine Bow Coal Company located 15 miles from the Seminoe II mine.

While these plans were proceeding in the West, however, Arch faced difficulties in the East. The Fabius mine was losing money and having trouble meeting its commitment to the TVA. Early in 1973, the mine defaulted on its notes reverted to the TVA, which had guaranteed them three years earlier. Saddled with Arch's debt, the TVA could have taken control of the mines. Instead, it decided to let Arch continue under its management.

During the early 1970s, Arch's financial fortunes were erratic. The company lost &Dollar;1.049 million in 1970 on sales of &Dollar;1.3 million, &Dollar;540,000 on 1971 sales of &Dollar;6.1 million, and made &Dollar;617,000 in 1972 on sales of &Dollar;13.3 million. In 1973 problems at the Fabius mine caused &Dollar;3.2 million worth of red ink--despite the opening of Seminoe II--and it was only after the Arab oil boycott caused coal prices to rise that Arch's balance sheet moved firmly into the black with &Dollar;4.3 million worth of profits in 1974.

Heckman had much to be proud of, but a heart attack prevented him from enjoying his accomplishments. During his convalescence, arch's ace coal marketer, Jerry Patrick, had ascended to the helm as acting chief executive officer. Patrick was brilliant but impatient. When Heckman returned, Patrick was made president and, despite having no formal technical background, was put in charge of operations.

In 1975 the Medicine Bow mine opened and profits soared to &Dollar;27 million on sales of &Dollar;116 million. The balance sheet, though, masked problems, especially at the Captain mine in Illinois where Patrick was not attending to efficiency. Patrick allegedly had alienated much of the original staff and caused many of Kelce's original circle to leave.

Despite problems and miscalculations, Arch remained profitable through the late 1970s and early 1980s. In December of 1977 Jerry Patrick pushed through a special &Dollar;28 million bucket and wheel system for the Captain Mine. The system was supposed to improve efficiency, but since it failed in the rain and was stopped by boulders, it ultimately proved counterproductive.

In mid-December of 1977 the coal industry was hit with a four-month strike, which threatened Arch's commitments. Nonunion operations in Wyoming worked over time, though, and in June of 1978, Arch reported profits of &Dollar;14.1 million on sales of &Dollar;156.8 million.

By 1979 problems were increasing at the operating level. Morale was down, absenteeism was up, and Jerry Patrick's name was mentioned all too often as a cause. Finally, Heckman moved Patrick out of operations.

In the early 1980s, profits hovered between &Dollar;6 and &Dollar;8 million--not very impressive considering that the company was selling assets and that Heckman had the foresight in 1977 to arrange for a fixed rate 8.5 percent line of credit, which, in a time of high interest rates, was saving the company &Dollar;4 to &Dollar;8 million a year. After Heckman fired Patrick in June of 1982, he began conversations with R. E. Samples, chief executive officer of Consolidated Coal (Consol). Samples, one of the bright, younger executives of the industry, who felt constrained by Consol's parent, Dupont, approached Heckman about moving to Arch. Hoping Samples could provide the technical leadership the company needed, Heckman hired him as president in September of 1982.

Samples acted quickly, reducing overhead especially at headquarters, where he eliminated the entire public relations department. He probed the staff, sent desk men into the field, appointed a vice-president for human resources, and placed human resources people and controllers at mine sites. At the Captain mine, he removed the bucket wheel excavator and substituted more efficient equipment.

From an operations point of view, things at Arch began to improve. Samples placed new management at several mines. Unafraid to make unconventional choices, he put controller Terry Sullivan, a man skilled at spotting troubles but lacking operational experience, in charge of the troubled Corona mine. Sullivan knew enough to listen to the people who worked for him and increased production and productivity. He did so well, in fact, that management eventually moved him to the troubled Captain Mine.

With operations strengthened, Heckman and Samples focused on acquisitions. In 1984 they paid &Dollar;145 million for troubled U.S. Steel's coal business. This was Arc's first Appalachian operation and it included three fully staffed "drift mines" (tunneled horizontally into the mountainside) in Lynch, Kentucky, and more than 400 million tons of low-sulfur reserves in Kentucky and Virginia. By June of that year, Arch's coal production reached 10.3 million tons, and net earnings hit a record &Dollar;28.3 million.

In 1985 Arch began winding down operations at Seminoe I and Medicine Bow. But while old operations were closing, new ones were opening. At the Captain Mine in Illinois, management unveiled the underground Kathleen mine to help meet obligations. At the end of 1985 Arch of Illinois acquired the Leahy mine from Amax and the following year opened the Horse Creek mine three miles northeast of the Captain mine.

Still on the acquisition trail, in the fall of 1985, Heckman and Samples began negotiating to buy troubled Diamond Shamrock's coal operation. With reserves of six or seven hundred million tons, including the4 Falcon Coal Company in eastern Kentucky, the Amherst Coal Company in West Virginia, and the Trail Mountain Coal Company in Utah, Diamond Shamrock would lift Arch into the ranks of major coal companies. After problem-filled, on-again-off-again negotiations, Arch paid &Dollar;135 million for Diamond Shamrock Coal in 1987.

To make the Diamond Shamrock properties profitable, Arch followed the pattern it established with previous acquisitions. According to Coal, Arch took "once underutilized operations typically running at high costs with low productivity," trimmed Diamond Shamrock's costs "by as much as two-thirds," and increased productivity by "three-fold or more." In practice this meant introducing young management teams, initiating safety and employee communications programs, commencing management development programs, revamping labor relations, and working to instill pride in employees.

An example of Arch's efforts could be observed at the North Fork, which, under Diamond Shamrock, was hamstrung with labor and contractor agreements, diminishing reserves, and high costs. Arch ended an expensive cost-plus contract with truckers and offered a purchase agreement on which truckers bid. For miners, it imposed a new agreement despite a two-and-a-half week strike. "At no time," Arch on the North Fork President Ron Gaudiano told Coal, "were there surprises. Everything we did was up-front and was told to our employees verbally and in writing. We communicated with them and built a trust. They may not have liked what we were saying, but they appreciated being told. That continues today."

The U.S. Steel and Diamond Shamrock acquisitions dramatically increased Arch's presence in Appalachia. In 188 Arch created Catenary Coal "primarily, " Catenary president Gerald Peacock explained in Coal, "to develop contractor operations on isolated small pockets of [Appalachian] reserves that do not lend themselves to large operations, and whose coals can be shipped primarily raw."

By June of 1989 Arch Mineral was producing 23 million tons of coal annually. It had acquired more reserves from Lawson Hamilton properties and in July of 1989, Arch of Wyoming acquired the Stansbury mine in Wyoming from Bitter Creek Resources. Growth continued with the acquisition of Blue Diamond Coal, and in April of 1991, Arch and the University of Kentucky resolved a long-running dispute that previously prevented Arch from mining lands adjacent to a University forest research project.

By 1992 Arch was one of the country's leading and fastest-growing coal producers. Perhaps the only cloud on its horizon was the Clean Air Act, which might cause some clients to reassess their use of Arch of Illinois's high sulfur coal. Company officials however did not seem to be worried. Steve Carter, head of marketing for the expanding company, told Coal, "The feeling here at Arch is that the effect of the act will be less than some other producers believe. Much of our high-sulfur coal, which comes primarily from the Illinois operations, is already going to utilities equipped with scrubbers. We think too, that many Midwestern utilities that are potential customers for our Illinois coal will opt for the use of scrubbers."

Principal Subsidiaries: Arch of West Virginia, Inc.; Arch of Kentucky, Inc.; Arch on the North Fork; Catenary Coal Co.; Arch of Illinois, Inc.; Arch of Wyoming, Inc.; Arch Transportation Co., Inc. ; Arch Coal Sales Inc.