Arch Coal (NYSE: ACI) sees short-term potential for coal demand in getting the coal plants that survive new U.S. Environmental Protection Agency air rules running harder, and even can find a silver lining in the current cheap supply of shale-play natural gas that is driving coal-to-gas switching by power generators.
John Eaves, Arch President and CEO, said during an Oct. 26 earnings call: “Longer term, we do see upside in the domestic coal markets. Clearly, the industry will be impacted by coal plant closures stemming from aggressive EPA regulations. We estimate that 45 GW of coal generating capacity could be retired by 2018, but these at-risk plants are the smallest and least efficient in the coal fleet and are already running at very low levels. Those at-risk plants likely will consume just 40 million tons of coal in 2012, down from 75 million tons consumed in 2010. Thus, any incremental negative impact from these potential coal plant retirements is likely to be modest.”
The lost consumption from these at-risk units could be offset by increasing utilization at the remaining 280 GW of installed coal capacity, Eaves added. “Collectively, the remaining coal plants are running below a 60% utilization rate today,” he said. “As U.S. power load grows, it’s reasonable to assume that the underutilized coal units could pickup that incremental burn lost from the retired plants.”
Arch Coal also believes that the increased manufacturing activity could be a driver of its business in the years ahead. The supply of cheap shale gas could attract an industrial base back to the U.S., and that could benefit coal, Eaves noted. First, new coal demand could come through making the steel required to build the factories and, second, by producing the power required to run them. “If coal plant capacity rates rebound to levels achieved in 2010 of 72%, U.S. coal demand has the potential to grow by as much as 100 million tons to 150 million tons in future years from a 2012 base,” Eaves said.
Major capital spends in 2013 will be on Leer, PRB lease payment
Paul Lang, Executive Vice President and COO, said to help save money in the current tough market, Arch previously cut $50m from its 2012 capital spending guidance. In light of the company’s reduced footprint in Appalachia and the ability to redeploy idled equipment in other active operations, Arch believes it can reduce its 2013 capital spend to around $350m, which is $70m below the reduced 2012 levels.
The 2013 capital plan is focused on three main items: the completion of the Leer longwall met coal mine in northern West Virginia, the second South Highlight federal coal reserve lease payment in Wyoming, and normal maintenance capital for operations. South Hilight was new coal for the Black Thunder mine in the Powder River Basin, which is the second biggest coal mine in the U.S. Lang said that in 2013, the company is looking at about $100m in spending for Leer, about $60m for the South Hilight lease payment and the balance in maintenance CapEx.
In December 2011, Arch was the successful bidder at the U.S. Bureau of Land Management for the $300m South Hilight tract. Arch bid $1.35 per ton for the 1,977-acre South Hilight tract, which contains an estimated 222 million tons of minable coal reserves in Campbell County. That $1.35 per ton was a new PRB record. Under the BLM system, 20% of the sale price is paid upfront, with the rest paid in 20% increments over the next four years.
Eaves also answered an analyst question about a long-rumored process where Arch is looking to divest non-core mines. The potential for it to have such mines in hand increased with the June 2011 acquisition of International Coal Group, which several of the ex-ICG mines closed in recent months due to poor markets. One part of the question asked if this is too much of a buyer’s market right now to get much sale value for these assets.
“[W]e’ve always been buyers and sellers of assets, and we’ll continue to do that,” Eaves responded. “We have an ongoing process within the organization where we’re always looking at our portfolio, seeing what makes strategic sense, what doesn’t. I would agree with you, in this environment it might be tough. But we’re not going to firesale assets. We think what we have value and we want to get that value. And if somebody is not going to give us that, we’ll retain them. But I would tell you that it’s always something we continue to look at and we’ll make the appropriate business decision.”