Arch Coal again slashes steam coal operations due to slack power market

Arch Coal (NYSE: ACI), which like other coal producers has already sharply cut its coal production due largely to slack steam coal demand, on June 21 announced plans to idle several operations and to reduce production at other mining complexes in Appalachia.

These actions, along with other recent changes in Appalachia, will result in a total workforce reduction of about 750 full-time employee positions.

“We deeply value our people, and the decision to reduce personnel was made only after exhaustively reviewing other options and exploring opportunities to avoid this measure,” said John Eaves, Arch’s president and CEO. “We sincerely regret the impact this announcement will have on our employees and their families as well as on the local communities where we operate. This decision was difficult but necessary in order to weather the current downturn and to position the company for long-term success.”

Arch’s subsidiaries will close three higher-cost thermal mining complexes and associated preparation plants, temporarily idle Hazard’s Flint Ridge complex in eastern Kentucky and curtail production at other operations in Kentucky, Virginia and West Virginia. The mine locations affected by the announced closings are the East Kentucky, Eastern and Knott County complexes. For full year 2012, Arch expects average cash costs in Appalachia, excluding severance and related costs, to remain in the range of $68 per ton to $73 per ton.    

These actions will reduce Arch’s thermal coal production by more than 3 million tons annually. Arch, though, continues to expect thermal coal sales volume in the range of 128 million to 134 million tons for 2012. The company also plans to realize savings on future capital spending due to the idling of several operations and the redeployment of equipment into other active operations. Arch estimates future reductions in annual capital expenditures in the range of $30m to $40m.

“Current market pressures and a challenging regulatory environment have pushed coal consumption in the United States to a 20-year low,” said Eaves. “In response, we had previously streamlined capital spending, idled equipment and reduced shift work. We now are taking further steps to enhance our competitive cost position in Appalachia, while increasingly shifting our portfolio in the region toward higher-margin metallurgical coal operations. Despite the operational changes announced today, we are still able to serve customers here and abroad with the high level of quality they have come to expect from Arch.”

Eaves said a strategic portfolio review is ongoing and may result in the future divestiture of some of Arch’s noncore assets or reserves. “The continued aggressive steps we’re taking to optimize our portfolio will allow us to better manage through the current business cycle and to prosper in the inevitable market rebound,” added Eaves. 

Arch expects to incur one-time, non-cash asset write-down charges of around $425m in the second quarter, and severance and related costs totaling about $14m to be recorded between the second and third quarters. Based on Arch’s recent level of stock market capitalization, and in accordance with accounting rules, the company also anticipates that it will incur a non-cash goodwill impairment charge for the three months ended June 30, 2012. The non-cash asset write-down and goodwill impairment charges are excluded from the company’s earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) calculation for the purpose of determining compliance with covenants in its credit facility.

St. Louis-based Arch Coal is a top five global coal producer and marketer, with 157 million tons of coal sold in 2011. Arch, which took over International Coal Group in June 2011, is the most diversified American coal company, with active mining complexes across every major U.S. coal supply basin. Most of the new reductions are at ex-ICG operations.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.