Arch Coal looks for partial U.S. coal rebound in 2013

Arch Coal (NYSE: ACI), which on Feb. 5 reported a net loss of $295m for the fourth quarter of 2012, said that in 2013 it expects U.S. power producers to increase output at coal-fueled power plants – as higher natural gas prices relative to last year make western U.S. coals an increasingly competitive resource for electricity generation.

Internal forecasts suggest U.S. coal consumption in 2013 will rise by as much as 50 million tons versus last year, said the St. Louis-based company. In the West, Arch operates two coal strip mines in the Powder River Basin of Wyoming and longwall-equipped mines in Utah and Colorado. PRB coals, particularly, are the most competitive cost-wise with cheaper natural gas.

Continued rationalization of high-cost domestic supply, coupled with improved U.S. coal burn, will result in further liquidation of coal stockpiles at U.S. power generators in 2013, Arch said. According to government data, U.S. coal production declined nearly 80 million tons in 2012, with the rate of decline accelerating in the fourth quarter. Production from Central Appalachia, where Arch has a presence, declined 36 million tons in 2012, and ended the year below 150 million tons.

“We are beginning to see signs of a recovery in coal markets after a very challenging 2012,” said John Eaves, Arch’s president and CEO. “Assuming normal weather trends prevail – and economic activity continues to accelerate – we see global coal supply and demand balancing over the course of 2013, setting the stage for improved market fundamentals.”

Fourth quarter loss not as bad outside of special items

Excluding acquired sales contract amortization, goodwill and intangible asset impairment charges, other non-operating expenses and the related tax impacts of these items, Arch’s fourth quarter 2012 adjusted net loss was $89m. In the fourth quarter of 2011, Arch reported adjusted net income of $62m.

“Arch continued to successfully execute its operational strategy and made progress on a number of fronts in the fourth quarter while weathering challenging coal market conditions,” said Eaves. “Our Western Bituminous Region delivered a record cash margin performance, and our other regions generated positive cash flow even while running at significantly reduced volume levels. In addition, we shipped 3 million tons overseas in the fourth quarter, capping a record year for company exports.”

For full year 2012, Arch reported an adjusted net loss of $77m. Revenues totaled $4.2bn on coal sales of 141 million tons in 2012 compared with $4.3bn in revenues on coal sales of 155 million tons in the prior year. Adjusted EBITDA was $688m in 2012 versus $921m in 2011.

“Arch achieved several notable milestones while managing through a tough 2012,” said Eaves. “First, we delivered another strong performance in our core values of employee safety and environmental stewardship. Second, the company’s exports rose to a record 13.6 million tons in 2012, demonstrating its growing presence in the seaborne coal trade. Third, we further improved our operational efficiency through the consolidation of operations, strong cost control at active operations and significant reductions in capital spending. Lastly, we further bolstered our liquidity to $1.4 billion, positioning Arch to weather near-term market headwinds and emerge from this cycle as an even stronger producer.”

Eaves added: “Looking ahead, we are seeing signs that a coal market rebound is possible in the second half of 2013. At Arch, we are running our operations in a manner that will enable us to capitalize on the rebound as it occurs. We are proactively responding to increased interest for Western Bituminous coal after several years of weakness. We are also making progress in realigning our asset portfolio in Appalachia – and expect our competitive position to be further enhanced as the Leer longwall starts up in the third quarter of 2013. In the Powder River Basin, we are continuing to focus on controlling costs as we manage our operations at significantly reduced production levels.”

Leer is a new mine in Taylor County, W.Va., that Arch picked up in a June 2011 buy of International Coal Group that is targeted to produce high-value metallurgical coal.

In the fourth quarter of 2012, Arch recorded a non-cash impairment charge of $231m related to the company’s goodwill and intangible assets, primarily due to the decline in benchmark met coal prices versus 2011. These charges have no impact on Arch’s liquidity and cash flow from operations and do not impact the company’s ongoing business operations. Arch said it also recorded a $58m charge in the fourth quarter to reflect the rejection of a customer supply contract by a U.S. Bankruptcy Court and the assumption of the contract obligation by Arch. Accordingly, Arch accrued for the full present value of the contract in 2012. 

In the resurgent Western Bituminous Region, Arch earned a record cash margin of $18.68 per ton in the fourth quarter of 2012 versus $11.56 per ton in the third quarter. Volumes in the fourth quarter declined moderately compared with the third quarter. The longwall at Skyline in Utah resumed operation in late October, while the longwall at Dugout Canyon in Utah was idled after completing its final panel in the Gilson seam. Sales price per ton increased 5% over the same time period, reflecting a favorable mix of customer shipments. Cash costs per ton in the fourth quarter declined more than 20%, partially driven by incremental production from Dugout Canyon’s longwall when compared with the third quarter.

Arch predicts 2013 coal sales that may top the depressed 2012 figure

Arch in 2013 expects sales from company-controlled operations of between 133 million and 144 million tons for the full year. Its sales in 2012 were 141 million tons. Included in this projected range are projected sales of 8 million to 9 million tons of met coal. At expected volume levels, Arch is nearly 90% committed on thermal sales for 2013. Given the below-capacity production levels projected for 2013, Arch currently anticipates that cash costs per ton in each of its operating regions will be similar to 2012 levels.

“On the thermal side of our business, we have layered in some sales to run our mines efficiently in 2013, but have elected to continue operating at reduced volume levels at this time,” said Paul Lang, Arch executive vice president and COO. “We have also maintained some sales leverage where we believe opportunities will present themselves over the course of 2013. On the metallurgical side, we have strong commitments from our North American customer base, and we have some of our higher-quality coals still available to capture potential upside in an improving seaborne marketplace.” 

Capital expenditures totaled $395m in 2012, which was $145m less than in 2011 and $25m less than the company’s projected spend. For 2013, Arch expects capital spending to be at or below $350m, which includes $100m for the completion of the Leer mine and $80m for reserve additions. The remaining capital expenditures will pertain to maintenance and efficiency projects.

“We expect 2013 to be a rebalancing year for global and domestic coal markets, and our current guidance range reflects this assumption,” said Eaves. “Coal price increases are likely to follow what we expect will be improving coal supply and demand trends. As such, we believe our performance in the second half of 2013 is likely to be stronger than in the first half.”

Arch Coal is one of the world’s top coal producers for the global steel and power generation industries, serving customers in 25 countries on five continents. Its network of mining complexes is the most diversified in the U.S., spanning every major coal basin in the nation.

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.