Arch Coal (NYSE: ACI), one of the top U.S. coal producers, said May 1 that the “severe weakness” in U.S. thermal coal markets impacted first quarter results and that it is further curtailing production in 2012.
“The severe weakness in U.S. thermal coal markets impacted our first quarter results and, consequently, we are resetting our 2012 expectations,” said John Eaves, Arch President and CEO. “Based upon an unprecedented build in power generator coal stockpiles year to date, the continued erosion in natural gas prices and relatively soft global metallurgical demand, we are further curtailing our production in 2012. While lower planned volumes will have predictable consequences on our near-term financial results, we believe we are taking the right steps now to position Arch for success as coal markets recover.”
Arch is taking several aggressive steps to increase operational efficiency and productivity during the cyclical market downturn, including:
- Matching production levels to current demand to help reduce the oversupply in domestic thermal markets, which includes leaving nearly all unsold thermal volumes in the ground to preserve the future value of those reserves. In total, Arch expects to reduce annual volumes by 25 million tons in 2012 versus originally planned levels.
- In the Powder River Basin, Arch idled one dragline, placed another into reclamation and limited railcar loadings at the Black Thunder mine’s West Loadout during the first quarter. The company plans to have a total of three draglines and supporting equipment on idle in the second quarter. Black Thunder in 2011 was the nation’s second-largest coal mine.
- In Appalachia, Arch delayed the startup of Mountain Laurel’s longwall in the first quarter following the successful transition to the Cedar Grove seam, as well as closed five thermal operations and further curtailed production at other thermal mines. Mountain Laurel is located in Logan County, W.Va. Since the market downturn, Arch units have eliminated about 500 positions.
- In the Western Bituminous Region, which includes Colorado and Utah, Arch continued to rationalize supply at the company’s higher-cost mines.
Arch is re-aligning capital spending plans with a goal of optimizing its asset portfolio, while ensuring that the company continues to execute on its long-term growth initiatives by lowering capital spending at thermal mines, matching maintenance capital needs to reduced volume expectations and cautiously proceeding with higher-return metallurgical projects.
Arch further reduced its discretionary capital expenditures by $45m, and now expects to spend a total of $410m to $440m in 2012. The company also is evaluating capital spending plans in future years, including the potential delay of thermal coal replacement and expansion projects.
Arch continues, in the meantime, to advance the development of the newly-named Leer mine in northern West Virginia, with the low-cost, longwall metallurgical coal mine targeted to begin operations in mid-2013. The mine was formerly known as Tygart Valley No. 1.
Arch is expanding its coal export network, with plans to ship 12 million tons of coal for export during 2012. It also said it is considering the potential divestiture of non-core assets or reserves. Bloomberg recently reported that it is taking offers for unnamed mines in Utah, Kentucky and Illinois.
Arch reported first quarter 2012 net income of $1.2m, compared with net income of $55.6m in the prior-year period. After excluding non-cash accretion of acquired coal supply agreements, Arch reported an adjusted loss of $0.04 per diluted share in the first quarter of 2012. Revenues reached $1bn in the first quarter of 2012, an increase of 19% versus the prior-year period.
“The U.S. coal industry is in the midst of a restructuring that will cause some players to exit the market and others, like Arch, to pare back operations until market conditions improve,” said Eaves. “Such change creates opportunities for our company, which is well-equipped to move tons offshore to serve growing global coal demand. The export market provides attractive growth potential for Arch given our low-cost mines and access to port capacity.”
U.S. thermal coal burn expected to fall at least 75 million tons in 2012
Arch now expects U.S. coal consumption for power generation to decline by at least 75 million tons in 2012, as compared to 2011, due to unfavorable weather trends that have reduced power demand and contributed to a natural gas surplus. These factors have led to an increase in U.S. coal generator stockpiles to date in 2012, and internal estimates suggest that stockpile levels could peak at around 210 million tons by the end of May, before starting to reverse.
Offsetting demand declines are significant U.S. coal supply reductions. U.S. Mine Safety and Health Administration data suggests that total domestic production decreased 14 million tons in the first quarter of 2012 versus the fourth quarter of 2011, or 56 million tons annualized. Arch expects coal supply reductions to continue as the year goes along.
On the other hand, the global coal trade through March is on pace to exceed the record 1.2-billion-ton level set in 2011. More than 185 new coal-fueled plants are expected to come online in 2012, resulting in about 400 million tons of incremental annual coal demand this year alone. Momentum in global steel markets also is increasing, as steel output grew 6% during the first quarter of 2012 versus the fourth quarter of 2011. Global steel capacity utilization rose to 81% in March, and U.S. steel utilization hit 81% in April.
Tightening met coal markets and growing seaborne thermal demand should increase U.S coal exports in 2012, while coal imports into the U.S. are set to decline further. Arch currently expects that U.S. coal exports could reach 115 million tons this year, with imports declining to 6 million tons – for an increase in net exports of nearly 15 million tons.
Arch is expecting sales volume of 128 million to 134 million thermal coal tons in 2012, with 8 million to 8.5 million tons of met coal sales. Arch’s new guidance range for 2012 reflects the reduction of nearly all unsold thermal volumes, lower expectations for high-vol B metallurgical coal sales, and the predicted impact of lower volumes on per-ton costs.
St. Louis-based Arch Coal is a top five global coal producer and marketer, with 157 million tons of coal sold in 2011. Arch is the most diversified U.S. coal company, with more than 20 active mining complexes across every major U.S. coal supply basin.