Arch Coal’s net loss widens in Q2 2014; sales guidance is cut

Arch Coal (NYSE: ACI), one of the top U.S. coal producers, on July 28 reported a net loss of $97m in the second quarter of 2014 compared with a $72m net loss in the second quarter of 2013.

Revenues totaled $714m in the second quarter, and adjusted earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) from continuing operations was $65m.

“During the second quarter of 2014, increased shipments, higher pricing and strong cost control drove margin expansion in each of our operating regions compared with the first quarter,” said John Eaves, Arch president and chief executive officer. “Our successful cost control efforts to date – underscored by strong operating performances at Leer in Appalachia and West Elk in Colorado – have allowed us to reduce our cost-per-ton expectations for those segments in 2014.”

For the first half of 2014, Arch generated adjusted EBITDA from continuing operations of $93m compared with $149m recorded in the first half of 2013. Total revenues declined slightly to $1.4bn during the first six months of 2014, largely due to lower metallurgical coal revenues versus the prior-year period.

“Recently, we’ve announced the idling of our Cumberland River complex in response to weak global metallurgical coal prices,” said Eaves. “Although idling higher-cost coking coal capacity lowers our metallurgical coal volume expectations for 2014, it also shifts our mine portfolio toward higher-margin metallurgical coal operations and enhances our competitive cost position in that region.”

Arch Coal announced July 21 that it is idling the Cumberland River Coal complex in Wise County, Va., and Letcher County, Ky. Cumberland River has two underground operations and related facilities. The mining complex previously shuttered two contract mines during the second quarter of 2013. Cumberland River sold approximately 290,000 tons in the first half of 2014, consisting primarily of higher-cost metallurgical grade coal.

“Through this cyclical downturn, we have been focused on controlling our costs and capital spending, and we have further reduced our capital outlay and administrative spending expectations for full year 2014,” said John Drexler, Arch’s senior vice president and CFO. “We remain confident that these ongoing initiatives – along with an expected strong operational performance in the second half – will help us maintain our solid financial footing going forward, and strategically position Arch to capitalize on a coal market recovery.”

“Our mines turned in solid performances in the second quarter, supported by cost reductions that improved margins across our operating platform versus the first quarter,” said Paul Lang, Arch’s executive vice president and chief operating officer. “Looking ahead, we expect strong cost performances in our Appalachian and Bituminous Thermal segments to continue, and we plan to remain nimble in response to market conditions.”

Arch sold 32.7 million tons in the second quarter, against 31.4 million in the first quarter of this year and 33 million tons in the second quarter of 2013.

Arch says the coal market needs to pick up – at some point

Arch said it believes the current coal market downturn is unsustainable over the long term. While global metallurgical coal prices are expected to remain soft throughout 2014, global steel production, a driver of metallurgical coal demand, has increased by 2.5% year-to-date and appears poised for continued expansion. Announced closures of higher-cost metallurgical coal supply have accelerated in 2014, and many capital growth projects have been delayed or cancelled as current prevailing prices do not justify incremental investment. Arch expects all of these factors to bring better balance to global metallurgical markets over time.

Adding to near-term pressures, prevailing soft seaborne thermal and metallurgical prices are likely to limit U.S. coal exports this year. Arch expects industry-wide coal exports from the United States to fall below 100 million tons for 2014 compared with 2013 export levels of 117 million tons.

In the domestic coal market, U.S. electric generation grew 2% through the first half of 2014, according to the Edison Electric Institute. Coal stockpiles at U.S. power generators have declined markedly this year, due to higher competing fuel prices and increased power load.

With prevailing mild summer temperatures to date, Arch now expects domestic coal consumption to increase by about 20 million tons in 2014 compared to last year. Even with the mild summer weather, however, coal stockpiles at power generators are likely to shrink – and could end the year at around 50 days of supply, the company noted. Customer coal inventories in some regions, such as the Powder River Basin, could decline to below-normal levels.

Arch reduces 2014 coal sales forecast

Arch is now expecting to sell 124 million to 130 million tons of thermal coal this year, and 6.3 million to 6.9 million tons of met coal. Based on current expectations, Arch is reducing its sales volume targets for 2014, reflecting the result of ongoing transportation bottlenecks affecting thermal coal deliveries and the impact of metallurgical production curtailments.

In April, Arch had been projecting thermal sales for 2014 to be in the range of 124 million to 132 million tons, and met coal sales of 6.3 million to 7.3 million tons.

Offsetting the volume reductions, Arch has reduced its annual cash-cost-per-ton guidance range for both its Appalachian and Bituminous Thermal segments. However, the company anticipates the timing of two longwall moves in West Virginia and the cost of idling Cumberland River to temporarily impact the Appalachian reported costs during the third quarter.

Additionally, Arch is further reducing its capital expenditures for 2014, and now expects to spend $170m to $180m for capital programs, inclusive of land and reserve additions.

“Looking ahead, we remain focused on those factors within our control to position Arch for a future market rebound,” said Eaves. “As coal markets turn, Arch can leverage its superior low-cost thermal and metallurgical asset base to create substantial value for our stakeholders.”

St. Louis-based Arch Coal is one of the world’s top coal producers for the global steel and power generation industries, serving customers on five continents. Its network of mining complexes is the most diversified in the United States, 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.