Arch Coal (NYSE: ACI) on Feb. 3 reported a net loss in the fourth quarter of 2014 of $240.1m, compared with a $371.2m net loss in the fourth quarter of 2013.
The net loss for the fourth quarter of 2014 includes an adjustment to the valuation allowance related to deferred tax assets, resulting in a non-cash income tax charge of $169m. The company also elected to freeze its employee pension plan benefits, resulting in a pension curtailment gain of $26.9 million, which was recognized in the fourth quarter of 2014.
“During the fourth quarter of 2014, improving operational results and steady shipment levels offset the softening pricing environment, allowing Arch to deliver its highest quarterly EBITDA in over a year,” said John W. Eaves, Arch’s president and chief executive officer. “Our strong cost performance in the Appalachian segment, underscored by an outstanding operational quarter at our Leer mine, demonstrates that our strategy to control costs, preserve liquidity and reduce capital outlays is effectively mitigating some of the industry-wide headwinds.”
Eaves added: “In 2014, we made significant progress optimizing the company’s cost structure and asset portfolio while maintaining our focus on employee safety and environmental stewardship. The successful ramp-up of our low-cost Leer mine, coupled with the impact of our Cumberland River complex coming offline, transformed our Appalachian metallurgical coal platform and significantly reduced our cost structure in the region. With our enhanced met platform and strong Powder River Basin franchise, we are confident that our diverse and balanced tier-one asset portfolio is well positioned for long-term value.”
For full year 2014, revenues totaled $2.9bn on coal sales of 134 million tons. The company generated adjusted EBITDA from continuing operations of $280.1m in 2014 compared with $252.1m in 2013. Arch also reported a net loss of $558.4m in 2014.
As part of the company’s ongoing asset portfolio re-alignment effort, Arch divested select, non-strategic assets in Appalachia in 2014, for total cash consideration of $46m.
“Our Powder River Basin and Appalachian segments generated strong cost performances in the fourth quarter, with our Appalachian region delivering its best cost performance in more than three years,” said Paul A. Lang, Arch’s executive vice president and chief operating officer. “The addition of the Leer mine to our operating platform has exceeded our already high expectations, enabling us to provide 2015 cost guidance in the region well below 2014 levels.”
Arch sold 35.2 million tons of coal in the fourth quarter of 2014, against 35.1 million tons in the third quarter of 2014. Arch’s consolidated cash margin per ton increased 20% to $3.36 per ton in the fourth quarter of 2014 from $2.79 per ton in the third quarter. Consolidated sales price per ton decreased slightly over the same time period, but was more than offset by a $0.72 decrease in consolidated cash cost per ton, reflecting lower cash costs in the Appalachian and Powder River Basin segments.
For full year 2014, Arch earned a consolidated cash margin of $2.72 per ton versus $2.82 per ton in the prior year, due in part to lower earned margins in the company’s Bituminous Thermal segment and lower pricing on metallurgical and export tons. Consolidated sales price per ton declined modestly, while consolidated cash cost per ton was flat over the same time period.
In the Powder River Basin, fourth quarter 2014 cash margin per ton declined 3 percent compared to the third quarter, attributable to lower realized prices per ton. Cash cost per ton declined slightly over the same time period, due to lower consumable costs.
For full year 2014, Arch earned a cash margin of $1.80 per ton in the Powder River Basin. Annual sales price per ton increased 3 percent versus the prior year, reflecting higher pricing on contracted tons. 2014 cash cost per ton increased 4 percent over the same time period, due to higher sales-sensitive costs and increased repair and maintenance costs.
In Appalachia, Arch earned a cash margin of $9.90 per ton in the fourth quarter of 2014 compared to $2.35 per ton in the third quarter. Sales price per ton increased modestly over the same time period, due to a higher percentage of metallurgical coal in the regional volume mix. Cash costs per ton in the fourth quarter decreased by $7.00, attributable to cost containment efforts, a strong performance at the Leer mine in northern West Virginia and improvements at the Mountain Laurel mine in southern West Virginia.
For full year 2014, Arch earned a cash margin of $5.38 per ton in Appalachia compared with $6.07 per ton in 2013. Annual sales price per ton declined 6 percent versus the prior year, reflecting softer pricing on metallurgical and thermal tons. Cash costs in 2014 decreased by $3.61 per ton versus 2013, benefitting from the ramp up of the Leer mine, the company’s ongoing realignment of its portfolio in the region and strong cost control.
In the Bituminous Thermal segment, fourth quarter 2014 cash margin decreased to $9.80 per ton versus $12.33 per ton in the third quarter. Sales price per ton decreased marginally over the same time period, while cash cost per ton increased 10%, due to increased repair and maintenance costs and higher development expenses.
For full year 2014, cash margin in the Bituminous Thermal segment totaled $9.94 per ton versus $10.96 per ton in 2013. Annual sales price per ton in 2014 declined 6% versus the prior year, driven by lower pricing on contracted and export tons. Cash cost per ton fell 4% over the same time period, benefitting from higher volume levels at the West Elk mine in Colorado.
Said the company: “Arch estimates that coal maintained approximately 40 percent of the U.S. power generation market in 2014. With a mild start to winter, domestic coal consumption ended the year roughly flat, resulting in coal stockpiles at U.S. generators of 145 million tons, a level on par with year-end 2013. On a regional basis, PRB-served power plants ended the year with an estimated 60 days of supply – 8 percent lower than the regional, year-end average.
“For 2015, Arch expects domestic market fundamentals to remain challenging due to the impact of mild winter weather on coal consumption and natural gas pricing and inventories. In addition, new regulations slated to take effect during the year could impact up to 25 million tons of annualized gross coal demand. In light of these developments, Arch expects declines in domestic coal use of 50 million to 60 million tons for 2015, and projects that a meaningful amount of uneconomic production will rationalize. Internal estimates suggest that along with other basins declining, Central Appalachia output will fall to an unprecedented 100 million tons in 2015.
“While seaborne thermal markets continue to be challenged by oversupply pressures, power demand continues to increase around the world as countries urbanize and middle class populations expand. It is projected that by 2030, Asia’s middle class will grow to more than 3 billion people, driving significant increases in steel and electricity needs in the region. To accommodate that growth, approximately 150 gigawatts of new coal-fueled capacity is currently under construction around the world and expected to be operational by 2018, resulting in an estimated 440 million tons of additional coal demand.
“Global metallurgical coal markets remain weak going into 2015, with oversupply gradually being absorbed and demand growth slowing in some countries. However, with European steel sector growth projected to be above average, Arch expects 2015 U.S. metallurgical coal exports into the Atlantic Basin could remain near 2014’s elevated levels. Arch believes seaborne metallurgical markets will balance over time as demand continues to grow, future production projects are canceled and current and anticipated supply rationalizations start to impact the market.”
Arch said it has established production targets for 2015 that are in line with 2014 levels. The company expects to sell between 124 million and 136 million tons of thermal coal and between 6.3 million and 7.0 million tons of metallurgical coal during 2015. At estimated volume levels, Arch is more than 90% committed on thermal sales for the full year.
“Our thermal portfolio is heavily committed for 2015 at prices above what we achieved in our main thermal segments in 2014 and above current market prices,” said Lang. “On the metallurgical side, we have a dynamic platform with favorable cost trends and strong commitments from our North American customer base, resulting in commitments at reasonable prices for approximately 60 percent of our estimated 2015 sales.”
Arch currently expects 2015 cash costs in the Powder River Basin and Appalachian region to be lower than 2014 levels, reflecting improvement in rail performance, the impact of lower diesel pricing and a full year of steady production at the Leer mine. Costs in the company’s Bituminous Thermal segment are expected to be slightly higher than prior-year levels. Arch also anticipates 2015 selling, general and administrative expenses and capital expenditures, which includes land and reserve additions, to be roughly in line with 2014 levels.
“Going forward, we will continue to focus on controlling the variables we can control, while running our low-cost, high-quality asset portfolio in a way that maximizes value,” said Eaves. “We are confident that by continuing to execute on our strategy to contain costs, maintain reduced capital spending and preserve liquidity and financial flexibility, Arch will be strongly positioned to excel as coal markets recover.”
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. 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.