Arch Coal (NYSE: ACI), one of the nation’s top coal producers, on Oct. 29 reported a net loss of $128.4m in the third quarter of 2013.
Excluding non-cash accretion of acquired coal supply agreements and asset impairment costs, Arch’s third quarter 2013 adjusted net loss was only $1.8m. In the third quarter of 2012, the company reported adjusted net income of $41.8m.
Revenues totaled $791.3m in the third quarter of 2013 on modestly higher sales volumes than in the year-ago period. Arch generated adjusted earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of $193.4m in the third quarter of 2013 compared with $256.5m in the prior-year period.
Third quarter 2013 results include a $115.7m pre-tax gain from the sale of the Canyon Fuel coal mining assets in Utah, and exclude non-cash, asset impairment charges of $200.4m. In the third quarter of 2012, results included an $80m benefit from the reversal of a previously recorded legal contingency.
“Arch is successfully navigating challenging global coal markets by controlling costs and capital spending and effectively managing liquidity,” said John Eaves, Arch president and CEO. “From an operational perspective, we are pleased to have delivered the best cost performance in the Powder River Basin since 2010. We also significantly enhanced our financial flexibility with the Canyon Fuel sale – and ended September with $1.4 billion in cash.”
Eaves added: “We are re-aligning our portfolio to focus on those core assets with the best long-term value and growth potential, particularly the Powder River Basin thermal franchise and the Appalachian metallurgical coal platform. To that end, we’re making steady progress on the Leer mine development, and expect the longwall to begin operation in December.”
Leer is a deep mine project in northern West Virginia that is the first of what could be several deep mines within a larger reserve area. Arch picked up this property in its 2011 buy of International Coal Group.
Arch completed the sale of its Canyon Fuel subsidiary on Aug. 16 and received net cash proceeds of $423m. The sale included the Sufco and Skyline longwall mines and the Dugout Canyon continuous miner operation as well as a total of 105 million tons of coal reserves in Utah.
Arch also recorded asset impairment charges of $200.4m in the third quarter of 2013. The charges primarily relate to the reduction in the carrying value of the Hazard thermal mining complex in eastern Kentucky due to ongoing weak thermal market conditions in Appalachia, as well as the write down of an equity investment in a coal conversion project. These charges have no impact on the company’s cash flows, financial maintenance covenant calculations or ongoing business operations.
Arch settles issues in Patriot Coal bankruptcy
In October, Arch entered into an agreement with Patriot Coal, which owns some former Arch Coal operations, that is subject to approval by Patriot’s bankruptcy court and contingent upon Patriot’s exit from bankruptcy.
Under this agreement, Arch will acquire the Guffey reserve property from Patriot for $16m. The metallurgical reserves are owned in-fee, are contiguous to Arch’s Tygart Valley reserves and the Leer mine, and are comparable in quality to Leer’s high-volatile “A” coking coal. The addition of these reserves will enable Arch to recover up to an incremental 8 million tons of metallurgical coal at the Leer mine, thereby extending the estimated mine life by nearly three years. The agreement also resolves all pending and potential legal claims with Patriot related to Arch’s sale of coal companies to Magnum Coal, a subsidiary of ArcLight Capital Partners LLC, in 2005 and the subsequent purchase of those companies by Patriot in 2008. During the third quarter, Arch recorded a $5m accrual for this legal settlement.
“As part of our effort to re-align the asset portfolio, Arch continues to execute its plan to divest non-core assets and reserves, idle operations or trim production in response to market conditions, and concentrate on core operations that will drive our profitability as coal markets improve,” said Eaves. “We are also pursuing value-enhancing growth initiatives in our strategic areas of focus. One such example is the Guffey acquisition, which represents a unique, synergistic, bolt-on opportunity that extends the reserves and mine life at Leer, one of our key metallurgical coal operations.”
“As our third quarter results demonstrate, we remain focused on controlling costs across our operating platform,” said Paul Lang, Arch’s executive vice president and chief operating officer. “Higher shipment levels and strong cost control in the third quarter led to the best cost-per-ton performance in 10 consecutive quarters in the Powder River Basin; and our ongoing success in that area has allowed us to lower our full year 2013 cost guidance again in key operating regions.”
Arch sold 38.3 million tons of coal in the third quarter, against 37.5 million tons in the year-ago quarter. That includes Canyon Fuel tons up to the time of sale of those operations.
Arch sees signs of coal market turnaround
Arch said it believes coal markets are poised to improve, as evidenced by the following trends:
- While U.S. power demand has declined slightly through August 2013 and natural gas prices have averaged about $3.65 mmBtu, U.S. coal demand for power generation has increased by more than 30 million tons for the first eight months of the year. Currently, the natural gas forward price curve is well above this average, suggesting that western coals will remain competitively priced for power generation for the foreseeable future.
- Since the second quarter of 2013, U.S. production declines have accelerated in Appalachia and Arch expects production in that region to decline to 130 million tons for full year 2013. This decline would represent a loss of more than 50 million Appalachian tons since 2010. Arch also expects 2013 coal production in the largest supply region, the Powder River Basin, to remain flat or even decline modestly versus last year’s levels.
- Coal stockpiles at U.S. power generators have declined by more than 25 million tons since the beginning of 2013, and continued to liquidate in September, a month in which stockpiles have traditionally increased. Arch estimates that customer stockpiles could end 2013 at around 150 million tons, which should help set the stage for a more balanced U.S. thermal market going forward.
- Metallurgical markets remain weak, due to excess global supply and continued softness in European steel demand. However, external forecasts project continued steel production growth in Asia and North America as well as stabilization in Europe in 2014. A continued rebound in coking coal demand, along with global production curtailments and delayed mining capital investments, should tighten metallurgical markets in the future.
- U.S. coal exports remain sizable, totaling 80 million tons year-to-date through August, despite some slowing in the second half of 2013. Arch predicts that U.S. coal exports should reach 105 million to 110 million tons for full year 2013, and it believes that longer-term growth prospects remain bright.
Company lowers met coal sales expectations for 2013
For 2013, Arch now expects thermal sales volumes to be in the range of 134 million to 137 million tons. The company has lowered its met coal sales expectations, and now expects to ship between 6.9 million and 7.3 million tons into coking coal and pulverized coal injection (PCI) markets during 2013.
“We have reduced our sales volume expectations for coking and PCI coal in 2013 due to a combination of events,” said Eaves. “Of note, we have recently shifted some personnel from our Sentinel mine to Leer in anticipation of the longwall start-up in December. We have also opportunistically sold some PCI-quality coal into the industrial market. And, we have deferred some previously contracted tons into 2014 due to a force majeure event with a customer.”
For 2013, Arch has reduced its annual cash cost per ton guidance range for both the Powder River Basin and Appalachia. The company also has lowered its guidance range for general and administrative expenses and further tightened its range for capital expenditures in 2013.
“We remain focused on those factors and dynamics within our control to position Arch for a future market rebound,” added Eaves. “We have curtailed capital spending, cut costs and expenses, and further streamlined our diversified asset portfolio. We have also significantly increased our liquidity, and we have an ample cash position to weather the current market.”