The Wall Street Journal reports that Patriot attorney Stephen Hessler told a bankruptcy judge on Wednesday that the company’s talk with the potential bidder, who he declined to name, could yield a challenge to lead bidder Blackhawk Mining at next week’s auction.

“We are hopeful … that we are in a position to have a second qualified bid” by Friday’s deadline, the WSJ reports Hessler saying.

He said the negotiations with the potential rival bidder was for a transaction “substantially similar” to that with Blackhawk.

Under the proposed deal Blackhawk will issue Patriot’s secured lenders debt securities totalling $US643 million plus Class B Units giving them an ownership stake in Blackhawk.

In addition Blackhawk would assume or replace surety bonds supporting reclamation and related liabilities associated with the purchased assets.

In return Blackhawk gets virtually all of Patriot Coal’s operating assets.

If that rival bid emerges Patriot will hold an auction on Monday.

Besides the Blackhawk proposal, Patriot has another leading bid for the rest of its assets from Virginia Conservancy Legacy Fund affiliate ERP Compliant Fuels.

Under the terms of that agreement VCLF/ERP would acquire, among other assets and liabilities, the Federal Mining Complex in northern West Virginia, the Corridor G Mining complex in southern West Virginia and other mining permits for purposes of land reclamation and water quality improvement.

VCLF/ERP is assuming liabilities in excess of $400 million in connection with Patriot’s workers’ compensation, state black lung and environmental obligations. It will also assume or replace surety bonds supporting reclamation and related liabilities associated with the purchased assets.

Patriot sought chapter 11 bankruptcy protection in May. That was less than two years after it came out of its previous court restructuring.