Can Arch Coal Make a Comeback?

Arch Coal (ACI) has been absolutely decimated this year as its stock has dropped almost 100% on the stock market this year. This is a result of the weakness in the coal market, which has created a negative impact on Arch Coal’s financials. For example, in the second quarter, its total revenue was $644.5 million, down 9.7% from last year.

Also, the coal miner posted second-quarter adjusted EBITDA of $45.3 million, down 30% from $64.9 million during the same period last year. The company witnessed a decline in both its revenue and EBITDA due to weak metallurgical coal prices and a low output.

Arch’s efforts

Arch is focused on lowering its costs and capital expenditures and therefore, has lowered its capital and administrative expenditure estimates by an extra $27 million for complete fiscal year 2015.

The ongoing and successful cost-cutting efforts of Arch has allowed it to maintain a strong balance sheet with significant liquidity and minimized debt obligations, encouraging the company to make future growth investments.

Importantly, Arch successfully countered the weaker global commodity environment including a highly challenging coal market scenario and declining shipment levels compared to the first quarter of 2015.
It continued to illustrate excellent operational performance with controlled per-ton costs in the Powder River Basin although with poor volumes and its Bituminous Thermal operations registered sharp decline in costs, whereas its Appalachian mines witnessed elevated costs mainly due to the two likely longwall moves in the quarter.

Considering the Powder River Basin, cash margin per ton for the quarter declined approximately 11 percent to $2.25 per ton compared to the first quarter. The margin reduction was mainly due to inferior average selling price per ton, depicting poor contracted pricing, mainly on indexed volumes, and greater percentage of reduced-quality tons in its local sales mix. Cash costs per ton remained constant, even with the fall in shipment volume primarily due to notable control of supplies and maintenance costs.

The solid cost control initiatives of Arch for the quarter were somewhat offset by significant lowering of the company’s margins owing to lower average selling price per ton for commodities globally including, coal.

In Appalachia, Arch witnessed a significant 77% decline in cash margin to $2.97 per ton in the second quarter of 2015 from $12.82 per ton during the previous quarter. Average selling price per ton grew somewhat owing to an expansion in the percentage of metallurgical tons available in the local sales mix. The estimated growth in cash cost per ton reflects poor output at the two small-cost longwall operations owing to the earlier mentioned second quarter longwall changes and the beginning of the yearly miners' rest period.

Although, an accelerated return to normal temperatures and significant global economic recovery are enhancing power demand, but the share of coal in global power generation has declined significantly, primarily replaced by low-cost natural gas fuel. Therefore, Arch continues to anticipate a decline in domestic utility coal consumption by approximately 80 million tons for this fiscal year.

Considering the globally challenging market environment, Arch has reduced the upper end of its thermal outlook and currently estimates thermal sales volumes for the fiscal year 2015 to be in 120 million to 124 million tons range.

The presence of low-cost alternative natural gas fuel is increasingly outshining and replacing the costlier metallurgical coal, negatively impacting Arch’s gross margins and overall profitability.

Conclusion

Though Arch Coal is making a number of positive moves in order to counter the weakness in the coal market, investors should not bet on a comeback. This is because Arch Coal will struggle to execute a turnaround due to weak coal demand that will weigh on the company’s performance. Hence, it makes sense to stay away from Arch Coal.
Published on Oct 9, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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