Arch Coal loses less money in Q3 2014; sees signs of market life

Arch Coal (NYSE: ACI) on Oct. 28 reported a net loss of $97m in the third quarter of 2014 compared with a net loss of $128m in the prior-year quarter.

Revenues totaled $742m for the three months ended Sept. 30, 2014 and adjusted earnings before interest, taxes, depreciation, depletion and amortization (“adjusted EBITDA”) from continuing operations was $72m, representing a slight increase compared with the same quarter of last year. In the third quarter of 2013, Arch recorded adjusted EBITDA from continuing operations of $69m, excluding results from the company’s Canyon Fuel assets in Utah, which were sold in August 2013 to privately-held Bowie Resources

“Arch delivered a solid operating performance in the third quarter of 2014,” said John W. Eaves, Arch’s president and chief executive officer. “In particular, our western thermal operations improved cash margins per ton versus the second quarter due to increased shipment levels, higher price realizations and continued strong cost control.”

For the first nine months of 2014, Arch generated adjusted EBITDA from continuing operations of $164m compared with $218m in the prior-year period. Revenues declined slightly year-over-year to $2.2bn for the nine months ended Sept. 30, 2014, on lower sales volume.

“Looking ahead, we expect our western thermal operations, particularly in the Powder River Basin, to benefit from incrementally improving rail service in the fourth quarter of 2014 and in 2015,” added Eaves. “In addition, we expect our metallurgical coal platform in Appalachia to benefit from a higher contribution by the low-cost Leer mine coupled with the favorable impact of idling the higher-cost Cumberland River complex.”

As of Sept. 30, 2014, Arch increased its cash and short-term investments balance to $1.05bn compared with approximately $990m at June 30, 2014. In addition, the company’s available liquidity, which includes its cash position and undrawn borrowings on its credit facilities, totaled more than $1.3bn at the end of September.

“Arch continues to successfully execute its plan to control costs and expenses, reduce capital outlays and preserve liquidity,” said John T. Drexler, Arch’s senior vice president and chief financial officer. “To that end, we are further reducing our expectations for corporate administrative expense and capital spending in 2014, and expect to end the year with approximately $1 billion in cash and short-term investments. This strong liquidity position, coupled with no debt maturities until mid-2018, provides Arch with the financial flexibility needed to navigate current coal market conditions.”

Arch’s cash margin per ton increased quarter-over-quarter by 24% in the Powder River Basin and 7% in the Bituminous Thermal segment. That margin expansion helped offset lower cash margin per ton in Appalachia in the third quarter, which stemmed from the impact of two scheduled longwall moves and costs associated with the previously announced idling of the Cumberland River operation.

Arch sold 35.1 million tons of coal in the third quarter, down from 37.2 million tons in the year-ago quarter.

Market Trends

Arch said it believes that global coal markets are in the early stages of rebalancing. Even with extremely mild summer weather across the United States, Arch continues to expect power generation to increase modestly in 2014, after three straight years of decline. Arch also expects annual domestic coal consumption to rise by 10 million tons in 2014, and for coal to maintain close to 40% of the power generation market.

Arch also forecasts coal stockpiles at power generators to decline below 135 million tons by Dec. 31, 2014, reflecting a drop of nearly 15 million tons since the beginning of the year and a decline of 50 million tons since the end of 2012. On a regional basis, Arch believes coal inventories for Powder River Basin customers are currently below normal levels, likely resulting in coal conservation activities by customers until rail carrier service improves.

Global thermal coal prices remain weak, but stronger power demand from a normal winter in Europe as compared to last year’s mild weather could result in higher seaborne coal demand. Overall, Arch said it expects industry-wide coal exports from the United Statesto decline by roughly 20 million tons in 2014 and likely continue that trend in 2015, setting the stage for a more balanced Atlantic Basin market.

Seaborne metallurgical coal markets remain over-supplied. While growth estimates for global steel consumption have been revised downward to 2% for 2014 and 2015, North American and European steel sector growth has remained above average. Arch continues to see reasonable demand for its metallurgical coals, but prices remain weak. As such, the company believes that metallurgical production curtailments announced to date – coupled with the lack of investment in future production, expected further production cuts and demand growth – will tighten global metallurgical markets over time.

Company Outlook

For 2014, Arch is maintaining its targeted sales volume range, which reflects the expectation for further improvement in rail service in the Powder River Basin during the fourth quarter. The company also recognizes the potential for some contracted tons in the Powder River Basin to carry over into 2015. 

Arch has again reduced its 2014 cost guidance range for the Bituminous Thermal segment due to a strong operating performance achieved year-to-date. The company also further reduced its corporate administrative budget, and now projects expenses of between $117m and $121m for 2014, representing a $7m reduction since the start of the year. Additionally, Arch is reducing its capital expenditures for 2014, and now expects to spend between $160m and $170m for sustaining capital programs, inclusive of land and reserve additions.

“While we continue to face challenges in coal markets, we remain focused on successfully managing those factors that we can control,” said Eaves. “We believe our ongoing efforts to optimize our asset portfolio, control our costs, reduce capital spending and preserve financial flexibility are bearing fruit, and will position Arch for success, growth and value creation as coal markets recover.”

The company is projecting sales of 124 million to 130 million tons of steam coal in 2014, with 6.3 million to 6.9 million tons of met coal. 

St. Louis-based Arch Coal, Inc. 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. 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.