Polo's Mongolian coal interests have a potential resource of more than 1 billion tonnes, with a majority of its coal licences located in the South Gobi coal region.
Peabody said the region hosted some of the largest metallurgical and thermal coal resources in close proximity to China, with potential to also access the Russian and export markets.
Polo currently has an active mining operation in Mongolia, with more than 100 employees onsite, primarily supplying the domestic market.
Under the agreement, Peabody would also be granted warrants to acquire about a 15% equity interest in Polo.
The deal is expected to close during the first quarter of 2009, subject to approvals.
“A joint venture with Polo's existing platform will accelerate the development of Peabody's presence in one of the world's premier undeveloped coal regions," Peabody chief executive Greg Boyce said.
“Because Polo has existing assets, coal resources and personnel in Mongolia, this transaction advances our goal of expanding our presence in high-growth, high-margin markets."
Polo CEO Stephen Dattels said the deal would give the alliance “the mining expertise and resources required to develop our asset base and unlock the currently unrecognised value of Polo's Mongolian interests”
Peabody is the world's largest private-sector coal company with interests in the US, Australia and Asia.