Arch Coal loses less money in Q4 2013, looks for stronger market

Arch Coal (NYSE: ACI), one of the top U.S. coal producers, said that a good sign for the coal industry is that U.S. utility coal inventories have shrunk to their lowest levels since 2006, opening the door for more coal sales in 2014.

The company’s fourth quuarter 2013 results reflect a softer pricing environment for metallurgical and thermal coals than in the prior-year quarter, as well as the impact of previously disclosed rail service issues in the Powder River Basin and geological challenges encountered in Appalachia. The company had a net loss in the fourth quarter of $371.2m, against a loss of $295.4m in the year-ago quarter.

“The December start-up of longwall operations at the Leer mine in Appalachia helped to counterbalance the impact of rail service disruptions and adverse geologic issues we faced in the fourth quarter of 2013,” said John Eaves, Arch’s president and CEO. “Looking ahead, we expect the new Leer mine to deliver a strong return on our $400 million investment given its high quality and strategic access to seaborne markets.”

The Leer mine, obtained in its development stage in 2011 in a buy of International Coal Group, is located in northern West Virginia.

The fourth quarter results include a non-cash goodwill impairment charge of $265.4m, which has no impact on the company’s liquidity, operating cash flow and ongoing business operations. Excluding the charge for goodwill impairment, early debt retirement, other one-time costs, non-cash accretion of acquired coal supply agreements and the related tax impacts of these items, Arch’s adjusted net loss was $95.1m in the fourth quarter of 2013. In the prior-year quarter, Arch reported an adjusted net loss of $88.7m.

Additionally, Arch recorded a $12m charge in the fourth quarter of 2013 to reflect the settlement of legal claims brought by the United Mine Workers of America (UMWA) against Arch subsequent to Patriot Coal‘s bankruptcy. Arch also completed the acquisition of the Guffey metallurgical coal reserves from Patriot Coal in December 2013 for $16m. These reserves will extend the life of the Leer mine by nearly three years.

“Arch achieved measurable success in 2013 by extending its strong safety track record, containing costs in key operating regions, reducing capital spending across the organization, exercising disciplined liquidity management, monetizing non-strategic thermal coal mines and completing a new metallurgical coal mine in West Virginia,” said Eaves. “However, due to a soft market environment particularly for metallurgical coal, Arch’s earnings decreased in 2013 compared to a year ago.”  

For full year 2013, revenues totaled $3bn on coal sales of 139.6 million tons. Coal sales in 2012 came in at 140.7 million tons. Arch sold 32.3 million tons in the fourth quarter, down from 38.3 million tons in the year-ago quarter.

Arch divested its Canyon Fuel subsidiary and its three deep mines in Utah for $422.7m in cash in August 2013. The company recorded a total gain of $120.3m on the sale, and anticipates cumulative capital and administrative cost savings of more than $200m during the next four years due to the divestiture of those assets.

“Arch’s achievements during 2013 helped advance the company’s long-term strategy of re-aligning the portfolio to focus on core assets with the best return potential,” said Eaves. “One such core asset is the Leer mine, which will upgrade and expand our Appalachian metallurgical coal platform. That platform, combined with our strong Powder River Basin franchise, creates a compelling long-term value proposition for shareholders – one that provides diversity to manage the volatility in the industry as well as significant growth potential as coal markets correct.”

Thermal coal inventories are down, while coal burn is up

Domestic thermal coal market fundamentals improved over the course of 2013. According to internal estimates, U.S. coal consumption for power generation rose by more than 35 million tons in 2013, while U.S. coal production totaled 984 million tons, the first time since 1993 that domestic coal supplies fell below the 1-billion-ton mark. As a result, U.S. power generator coal stockpiles fell over the course of the year, and reached the lowest year-end level since 2006 of approximately 148 million tons.

Arch expects U.S. thermal coal markets to tighten further in 2014, with favorable weather trends and healthier economic activity driving increased power demand. Also, elevated natural gas prices compared with prior years should ensure that western coals – as well as most eastern coals – are competitively priced for power generation. Even with growth in U.S. coal supply, Arch projects additional drawdown on coal stockpiles during 2014. If such a drop in stockpiles occurs, coal inventories at thermal customers would fall to levels not seen since 2005.

While thermal markets are gaining momentum, global metallurgical coal markets remain weak, Arch noted. However, seaborne met coal prices are likely at unsustainably low levels, making it difficult to justify ongoing and new capital investment. While new global metallurgical coal supply entered the market during 2013 and must be absorbed, incremental production increases going forward should be largely offset by rationalization of higher-cost metallurgical supply. These trends should tighten metallurgical markets in the future.

“Looking ahead, we will remain focused on what we can control – costs, capital spending and sales commitments,” said Eaves. “Our goal in 2014 will be to once again tighten our belts to reduce cash outflow further and increase operational efficiencies. In addition, we will continue to evaluate ways to strengthen and optimize our asset portfolio. With signs that a rebound in U.S. thermal coal demand and pricing may be forthcoming, we are managing our operations in a manner that will enable us to benefit from that rebound as it occurs.”

Arch expects to sell between 124 million and 134 million tons into thermal markets during 2014. The company also expects to ship between 7.5 million and 8.5 million tons into coking coal and pulverized coal injection (PCI) markets in 2014. That range reflects the impact of met coal production reductions and cutbacks made in 2013, offset by incremental longwall production from the Leer mine.

Currently, Arch anticipates that 2014 costs in the Powder River Basin will be slightly higher than 2013 levels, offset by lower estimated costs in Appalachia. Arch also expects a reduction in general and administrative expenses in 2014 versus 2013 levels. Capital expenditures totaled $297m in 2013, which was nearly $100m less than the company spent in 2012. For 2014, Arch currently expects capital spending of less than $200m, inclusive of $75m for scheduled payments for land reserve additions.

St. Louis-based 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 United States, spanning every major coal basin in the nation. The company controls more than 5 billion tons of high-quality metallurgical and thermal coal reserves, with access to all major railroads, inland waterways and a growing number of seaborne trade channels.

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.