Arch Coal Benefits from Stronger Cost Controls, Shipments in Third-Quarter 2012, Sees Hope Ahead for Coal

Researched by Industrial Info Resources (Sugar Land, Texas)--Arch Coal Incorporated (NYSE:ACI) (St. Louis, Missouri), a leading, diversified coal company, saw solid margin improvement in third-quarter 2012 as strong cost control, improved pricing and higher shipments offset many of the problems facing the U.S. coal industry. Coal exports are expected to continue strengthening in the near future. Net income for the quarter was reported to be $45.75 million, compared with $8.89 million in third-quarter 2011.

Arch Coal executives pointed out that earnings were less lopsided when using the "adjusted EBITDA" calculation, which eliminates the effects of interest, taxes, depreciation, depletion and amortization, as well as acquisition, transition, mine closure and asset impairment costs. Using this method, income stood at $256.51 million, a 21.31% increase from the same period last year.

Total revenues were reported to be $1.09 billion, a 9.26% decrease from third-quarter 2011. During the quarter, Arch Coal shut down three mines in Appalachia, which produced a total of 1 million tons in 2011, to help manage its expensive metallurgical coal supply. The Appalachian segment saw a reduction from the second quarter in thermal sales and prices on metallurgical shipments, although the number of metallurgical shipments increased. The two Western segments saw stronger results, however: the Powder River Basin segment saw trends improve and shipments increase in domestic thermal markets, and the Western Bituminous segment reported stronger demand and a favorable mix of customer shipments.

Industrial Info is tracking $1.27 billion in active projects involving Arch Coal, including the $400 million construction of a grassroot, underground, high-quality metallurgical coal mine in Grafton, West Virginia. The company will construct a 3.5 million-ton-per-year underground mining complex and 1,300-ton-per-hour preparation plant as part of a broader effort to take advantage of its diverse, low-cost asset portfolio. The project is expected to be completed in October 2013.

"Longer term, we remain bullish on coal market fundamentals," said John Eaves, the president and chief executive officer of Arch Coal, in a conference call. "That is why we continue to pursue opportunities that will help us grow, expand our global reach, and capitalize on markets as they recover. In a positive trend, we are seeing a slight improvement in the domestic thermal demand. While far from normal, we are encouraged by the pickup in activity in the Powder River Basin. No doubt, positive momentum has been driven by favorable summer weather."

In the third quarter, Arch Coal sold 37.5 million tons, a 6.02% decrease from third-quarter 2011, and had an operating margin of $2.07 per ton, a 27.11% decrease:

• The Powder River Basin operations reported sales of 27.7 million tons, a 3.82% decrease from the same period last year, and an operating margin of $1.28 per ton, a 12.33% decrease.
• The Appalachian operations reported sales of 4.7 million tons, a 25.4% decrease from third-quarter 2011, and an operating margin of $1.43 per ton, compared with $7.27 in the same period last year.
• The Western Bituminous Region operations reported sales of 4.6 million tons, a 9.52% increase from third-quarter 2011, and an operating margin of $7.66 per ton, a 32.07% increase.

Capital spending for full-year 2013 is expected to total about $350 million, which would be below this year's estimated total of between $410 million and $430 million. Arch Coal plans to take advantage of its low-cost asset base throughout 2013 and 2014, when company executives expect coal market fundamentals to improve. Eaves said the company believes global coal markets are undergoing a correction, with domestic thermal markets gaining momentum and metallurgical markets "bottoming out."

"We also believe that the increased manufacturing activity could be a driver of our business in the years ahead," Eaves said in the conference call. "The advent of shale gas could attract an industrial base back to the U.S., and that could benefit coal--first, with the steel required to build the factories, and second, with the power required to run them."

Arch Coal executives also said they expect U.S. coal exports to hit a record 125 million tons by the end of 2012, which would be more than twice that of 2007. Although the metallurgical market has declined, executives predict that stronger infrastructure spending in China and Brazil will yield improvement.

"We have shipped 10 million tons of export year-to-date, and expect to send 12 million tons out of the country for 2012," Eaves added. "More than half of our exports are moving to Europe, with 20% reaching Asia, and the balance moving into the Americas."

For more information, visit Industrial Info's North American Metals and Minerals Project Database.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.