With a price tag of $US709 million, Patriot will also become the second largest Central Appalachian producer when the deal closes midyear.
Magnum has a proven and probable reserve base of 600 million tons and sold 18.4Mt last year. Bridge financing and permanent arrangements are expected to be in place by the close of the transaction, which is now subject to regulatory approvals and other conditions.
Patriot president Richard Whiting said the Magnum takeover is parallel with the producer's strategy to grow through "synergistic, accretive acquisitions", especially in the Central Appalachian area.
“Magnum further strengthens our metallurgical coal position and expands our thermal coal presence in the important CAPP region, provides both current production and valuable reserves for future expansion, and is expected to be highly accretive within the first year," he said, adding that both companies have a similar and strong emphasis on miner safety.
“Magnum's significant presence and expertise in surface mining will further diversify Patriot's extensive asset base."
The terms of the acquisition include Magnum's receipt of 11.9 million newly issued Patriot coal common stock shares. Patriot, meanwhile, will take over an estimated $150 million in net debt.
Together, the two operators sold over 40Mt in 2007 with revenues reaching almost $2 billion. Its combined reserve base will exceed 1.9 billion tons, made up of 70% underground and 30% surface mining.
“The transaction is expected to provide substantial commercial and operational synergies," said Whiting.
“It will create economies of scale, enhance our product line, grow our customer base, provide more transportation options, and accelerate our brokerage and trading activities.
“We look forward to completing this transaction as soon as possible and welcoming Magnum's 1700 highly skilled employees to the Patriot team."
Magnum concurred that the transaction was a "unique opportunity" for both companies to attain "the benefits of scale and diversity that we believe are critical to further industry consolidation and long-term success in the coal sector," according to chairman Robb Turner.
“The combination of talent from these two management teams will create a premier organisation to manage and grow the enterprise," Turner said.
Magnum's majority stockholder, ArcLight Capital Partners, will hold about 16% of Patriot shares at closing, while a 15% interest will be owned by the balance of the company's stockholders.
St Louis-based Arch Coal sold 100% of its stock, operations and reserves for three of its divisions to Magnum, including Trout Coal, Hobet Mining, Apogee Coal and Catenary Coal, in late 2005. Those entities are made up of the Hobet 21, Arch of West Virginia, Samples and Campbells Creek operations.
The agreement was made in exchange for Arch's minority ownership in Magnum. Magnum subsequently chose Charleston, West Virginia for its home, opening its corporate offices there in June 2006.