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Arch Coal Reports Second Quarter 2013 Results

08/08/2013 - Despite achieving a sequential improvement in its earnings, Arch Coal, Inc. reported a net loss of US$72.2 million in the second quarter of 2013 as it faced weak coal market conditions.

Arch Coal, Inc. reported a net loss of US$72.2 million in the second quarter of 2013. Excluding non-cash accretion of acquired coal supply agreements and asset impairment costs, Arch's second quarter 2013 adjusted net loss was US$60.5 million. In the second quarter of 2012, Arch reported an adjusted net loss of US$22.1 million.
Arch reported second quarter 2013 revenues of US$766 million, representing a decline versus the prior-year quarter and reflective of overall weakness in the metallurgical coal markets compared with the year-ago period. Adjusted earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) totaled US$110.5 million in the second quarter of 2013 compared with US$180.9 million in the second quarter of 2012 and US$83.6 million in the first quarter of 2013, representing an increase of 32% versus the prior-quarter period. Arch's second quarter 2013 adjusted EBITDA excludes an asset impairment charge of US$20.5 million related to an investment in a clean coal power plant project that was cancelled.
"During the second quarter, we achieved a sequential improvement in our earnings as we continued to manage our business effectively in the face of weak coal market conditions," said John W. Eaves, Arch's president and chief executive officer. "Arch employed strong cost control, particularly in the Powder River Basin and in Appalachia, which positively impacted our per-ton margins. Our cost reduction initiatives are generating results, and we will continue to pursue aggressive cost reductions across all of our operations during the second half of the year."
As of 30 June 2013, Arch had a total liquidity position of approximately US$1.2 billion, with nearly US$900 million of that liquidity in the form of cash and short-term investments. The company had no borrowings under its revolving credit facility at 30 June, and has no long-term debt maturities until August 2016.
"Looking ahead, we remain sharply focused on further reducing discretionary operating costs and capital expenditures across the organization, pursuing non-core asset sales and managing our liquidity closely," said Eaves. "To that end, we are reducing our full year 2013 cost guidance expectations in every operating region and lowering our annual capital spending levels. We remain committed to successfully managing through this market downturn while continuing to set the stage for value creation for our stakeholders over the long term."
Key Developments
On 27 June 2013, Arch signed a definitive agreement to sell its wholly-owned subsidiary, Canyon Fuel Company, LLC, to Bowie Resources for US$435 million. The sale includes the Sufco and Skyline longwall mines and the Dugout Canyon continuous miner operation as well as approximately 105 million tons of bituminous coal reserves in Utah.
"We are taking the right steps to weather this downturn and emerge as an even stronger player when the market rebounds," said Eaves. "Beyond exercising cost and capital restraint, we are executing our strategy to divest non-core thermal assets, such as Canyon Fuel. This sale pulls forward multiple years of expected cash flows, reduces our future capital outlays and greatly enhances our financial flexibility."
As a result of the sale of its Utah operations, Arch expects to achieve cumulative capital and administrative cost savings of more than US$200 million from 2014 through 2017. This projected future spending would be required to sustain current production levels in the region. Upon closing, which is expected during the third quarter of 2013, Arch will receive gross cash proceeds of US$435 million. After adjustments, the company expects to record a pre-tax gain of approximately US$120 million related to the sale of Canyon Fuel.
"The divestiture of Canyon Fuel will streamline Arch's asset portfolio and allow us to focus our resources on the most value-enhancing parts of our business," said Eaves. "Those elements include optimizing a strong Powder River Basin franchise, building out and upgrading our Appalachian metallurgical coal platform and maintaining low-cost thermal coal assets to serve both the domestic and export coal markets."
Core Values
Arch continued to deliver strong safety and environmental performances in the second quarter of 2013. Arch's lost-time safety incident rate for the first half of 2013 was more than four times better than the national coal industry average and represented a 16% improvement over the company's incident rate during the same period last year. Arch also improved its environmental compliance record during the first six months of 2013 compared with the prior-year period.
Arch's operations were honored with five regional and statewide safety and environmental awards during the second quarter of 2013. The Rocky Mountain Coal Mining Institute honored Coal Creek, Dugout and Sufco with top awards for their outstanding safety records during 2012. In addition, the Skyline and Sufco mines in Utah received 2013 Earth Day Awards for their continued excellence in environmental performance.
"We congratulate our mine personnel for continuing to earn external recognition for outstanding safety and environmental performances in the second quarter, and we also want to recognize the eight operations and facilities that attained A Perfect Zero – a dual goal of operating without a reportable safety incident or SMCRA environmental violation – between April and June," said Paul A. Lang, Arch's executive vice president and chief operating officer. "These achievements reflect our ongoing commitment to operating safely and responsibly, and I commend the hard work and focus of our employees."
Operational Results
"Arch continued to decrease costs during the second quarter of 2013 and achieved lower cash costs per ton in several operating regions compared with the first quarter," said Lang. "Going forward, we believe our operations can continue to maintain and build on the strong cost performance demonstrated in the first half of the year." 
Second quarter 2013 consolidated cash margin per ton increased approximately 4% compared with the first quarter, benefitting from increased shipments and strong cost control in the company's Powder River Basin and Appalachian segments. Consolidated sales price per ton and consolidated cash cost per ton increased slightly over the same time period measured, primarily due to a larger%age of Appalachian tons in the company's overall volume mix.
In the Powder River Basin, second quarter 2013 cash margin per ton increased 3% compared with the first quarter due to the impact of higher sales volumes and strong cost control. Average sales price per ton declined slightly over the same period, mainly driven by lower pricing on market-based tons. The decline in average sales price per ton was more than offset by a 2% decline in cash cost per ton, largely driven by cost containment efforts and the impact of higher shipment levels.
In Appalachia, Arch earned a cash margin of US$8.48 per ton in the second quarter of 2013, an increase of 12% versus the first quarter. Second quarter 2013 sales volumes rose nearly 18% compared with the first quarter, due to an increase in metallurgical and thermal shipments. Average sales price per ton declined slightly over the same time period, reflecting lower prices on thermal tons. Cash cost declined US$1.46 per ton in the second quarter of 2013 versus the prior-quarter period, due to strong cost control and the impact of higher volume levels.
In the Western Bituminous Region, Arch recorded a second quarter 2013 cash margin of US$10.69 per ton compared with US$11.41 per ton in the first quarter. Sales volumes decreased slightly in the second quarter of 2013 versus the first quarter mainly on lower export sales, while average sales price per ton increased slightly due to a favorable mix of customer shipments. Cash cost per ton increased 4% over the same time period, driven by the impact of lower sales volumes and planned higher maintenance costs.
Market Trends
Arch believes currently depressed metallurgical coal market trends are unsustainable over the long term. Global crude steel production is forecasted to increase 35% between 2012 and 2020, reaching 2 billion tonnes by the end of the decade. Increased utilization at existing steel plants and the projected build-out of new steel capacity will drive future metallurgical coal demand. Moreover, capital spending for future metallurgical coal supply projects is being curtailed and supply rationalization at existing metallurgical coal operations is underway.  
"Even with a near-term cautious outlook on global metallurgical coal markets, we're confident that supply will decline and demand will rebound over time," said Eaves. "Metallurgical coal output and capital spending levels industry wide are in the process of significant rationalization, setting the stage for the next market upswing as global economies begin to improve."
The outlook for U.S. thermal coal is improving. Year-to-date through May 2013, domestic coal use for power generation has increased 10% compared with the same period last year. For 2013, Arch expects thermal coal consumption in the U.S. to rise by 50 million tons versus 2012 levels. Moreover, according to Mine Safety and Health Administration data, U.S. coal production has declined more than 20 million tons year-to-date through June 2013. Increased demand and decreased supply are reducing coal stockpiles at U.S. power generators. Internal estimates suggest that customer coal stockpile levels declined to roughly 170 million tons at the end of June 2013, representing a 15 million ton reduction since the beginning of the year.
Arch's outlook for global thermal coal markets remains constructive despite current price softness. Arch expects that U.S. coal exports will remain above 100 million tons in 2013 but will not keep pace with levels shipped in the first half of the year. "We are seeing the beginnings of a rebound in domestic thermal coal markets," said Eaves. "Additionally, higher coal consumption trends across Europe should be incrementally positive for U.S. coal producers, with higher thermal coal imports projected in Germany and in the U.K. in particular. These trends should continue to support U.S. exports into the seaborne coal trade over time."
Company Outlook
Arch currently expects thermal sales volumes, including volumes from Canyon Fuel, to be in the range of 130 million to 137 million tons for 2013. The company has lowered its metallurgical sales forecast, and now expects to ship between 7.7 million and 8.3 million tons into metallurgical coal markets during 2013.
"Given recent metallurgical market dynamics, we have idled two contract mines at Cumberland River during the second quarter and have elected to push back the longwall start-up at Leer until late in the fourth quarter," said Eaves. "These decisions have resulted in lowering our overall metallurgical coal sales expectations for 2013." 
For full year 2013, Arch also has reduced its annual cash cost per ton guidance range in each of the company's operating regions. In addition, Arch has further reduced its forecasted capital expenditures by approximately US$20 million for the full year, and now expects to spend between US$280 million and US$310 million for 2013.
"We will continue to focus on the things we can control during the downturn, while carefully positioning ourselves for the market rebound," added Eaves. "We have significantly curtailed capital spending, diligently reduced costs and further streamlined our diversified asset portfolio. Moreover, since the market downturn began in late 2011, we have significantly increased our overall liquidity, with an ample cash position to use for future debt reduction as coal markets improve."
U.S.-based Arch Coal, Inc. is one of the world's top coal producers for the global steel and power generation industries, serving customers in 25 countries 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.