Arch Coal sees improving market for thermal coal

Arch Coal (NYSE:ACI) President and CEO John Eaves reflected on the recent sale of the Canyon Fuel Co. and the state of the U.S. electric power markets demand for coal during the company’s first quarter earnings report July 30.

Arch officials also said they were delaying the startup of a longwall mine operation.

The outlook for U.S. thermal coal is improving. Year-to-date through May 2013, domestic coal use for power generation has increased 10%, Arch officials said.

For 2013, Arch expects thermal coal consumption in the U.S. to rise by 50 million tons versus 2012 levels. Moreover, according to Mine Safety and Health Administration data, U.S. coal production has declined more than 20 million tons year-to-date through June 2013.

Increased demand and decreased supply are reducing coal stockpiles at U.S. power generators. Internal estimates suggest that customer coal stockpile levels declined to roughly 170 million tons at the end of June 2013, representing a 15 million ton reduction since the beginning of the year.

On June 27, Arch signed a definitive agreement to sell its wholly-owned subsidiary, Canyon Fuel to Bowie Resources for $435m. The sale includes the Sufco and Skyline longwall mines and the Dugout Canyon continuous miner operation as well as approximately 105 million tons of bituminous coal reserves in Utah.

“We are taking the right steps to weather this downturn and emerge as an even stronger player when the market rebounds,” said Eaves. “Beyond exercising cost and capital restraint, we are executing our strategy to divest non-core thermal assets, such as Canyon Fuel. This sale pulls forward multiple years of expected cash flows, reduces our future capital outlays and greatly enhances our financial flexibility,” the CEO added.

As a result of the sale of its Utah operations, Arch expects to achieve cumulative capital and administrative cost savings of more than $200 million from 2014 through 2017. Closing is expected during the third quarter.

With the sale of Canyon Fuel, Arch will concentrate on its Powder River Basin franchise, upgrading its Appalachian metallurgical coal platform and maintaining low-cost thermal coal assets.

Arch sold 35 million tons of coal in 2Q13. That’s up from both 34.1 million tons in 1Q13 and 31.5 million tons in 2Q12.

In the Powder River Basin, Arch recorded a cash margin per ton of $2.09 in 2Q13. That’s up from $2.03 in 1Q13, but far below the $2.64 recorded in 2Q12.

In Appalachia, Arch earned a cash margin of $8.48 per ton in the second quarter of 2013, an increase of 12 percent versus the first quarter.

Arch reported a net loss of $72.2m, or $0.34 per diluted share, in 2Q13. Excluding non-cash accretion of acquired coal supply agreements and asset impairment costs, Arch’s second quarter 2013 adjusted net loss was $60.5m, or $0.29 per diluted share. In 2Q12, Arch reported an adjusted net loss of $22.1m, or $0.10 per diluted share.

Arch Coal started July 30 trading at $3.97/share.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.