Arch Coal – Still Down and Dirty ; Peabody Sees Rebound

Arch Coal Inc. (ACI) reported a narrower third-quarter loss and better-than-expected sales figures as it continues to cut costs in the face of slumping prices for the power plant and steelmaking fuel.

The net loss narrowed to $97.2 million, or 46 cents a share, from $128.4 million, or 61 cents, a year earlier, the St. Louis-based company said in statement today. Quarterly sales beat estimates as Arch increased output from western mines because of improved rail service.

Arch hasn’t turned a quarterly adjusted profit since 2011 amid coal’s worst downturn in decades. Faced with a six-year low for the price of metallurgical coal, Arch idled its Cumberland River complex in Central Appalachia in July. There’s a global surplus of the steelmaking ingredient after a slowdown in Chinese demand.

“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,” John T. Drexler, Arch’s chief financial officer, said in the statement. “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.”

‘No Surprises’

Other coal producers, including James River Coal Co. and Patriot Coal Corp., have filed for bankruptcy in the past two years as North American natural gas output soared, causing prices to drop to 12-year lows. Coupled with more stringent pollution measures, utilities are burning less coal to generate electricity.

The company reported $742.2 million in revenue, more than the $722.9 million average estimate and less than the $791.3 million it made during the same period last year.

“Overall, we see no surprises in the print, the company continues to hoard liquidity and aggressively cut costs,” Daniel Scott, a New York-based analyst for Cowen & Co., wrote in a note to clients today.

Arch climbed 9.5 percent to $1.96 at 10:54 a.m. in New York. The shares have declined 56 percent this year.

Excluding one-time items, the loss was 45 cents a share, exceeding the 41-cent average of 18 analysts’ estimates compiled by Bloomberg.

Other U.S. coal producers rose today. Walter Energy Inc. advanced as much as 11 percent before ending 1.3 percent higher, while Peabody Energy Corp. closed 1.8 percent higher. Alpha Natural Resources Inc. increased as much as 9.4 percent before closing 3.5 percent lower.

Investors see that the worst may be over for the coal market after a series of output cuts around the world

– said the chairman and chief executive officer of Peabody Energy Corp. (BTU), the largest U.S. producer.

“We’ve had essentially flat pricing now for about nine months,” Greg Boyce said in an Oct. 24 phone interview. “All of the investors are encouraged that that represents kind of a bottom to the commodities cycle, but they’re waiting to see what happens in terms of the timing of that uptick.”

Peabody and most of its publicly traded domestic competitors have posted losses amid the worst slump in the coal industry in decades. The price of metallurgical coal used in steelmaking has fallen to a six-year low because of slowing Chinese growth. Thermal coal used to generate electricity has also dropped on tighter emissions regulations and competition from cheap natural gas.

Shares of Peabody have fallen more than 9 percent since the start of trading on Oct. 20, when it reported a third-quarter loss of 56 cents a share. Boyce said Peabody’s stock declined because investors haven’t yet seen evidence that the global oversupply of coal is abating.

Peabody scaled back output of steelmaking coal at its Burton Mine in Australia this year. Glencore Plc and Walter Energy Inc. are among other producers that have made reductions. There have been 30 million tons of metallurgical-coal cutbacks announced globally this year, Boyce said in an Oct. 20 statement.

Rebound ‘Inevitable’

Investors will spend the next couple of quarters looking for signs of a recovery in coal prices, Boyce said. Given the industry’s reduction in new capital investments, a rebound is “inevitable,” he said.

“There’s going to be a long lag where you’ve got less supply than demand,” he said. “That’s going to have a strong, strong pull for the sector.”

Catalysts that coal investors are looking for include rising Chinese demand and an improvement in U.S. railroad capacity to deliver from mining regions such as Wyoming’s Powder River Basin, he said. Peabody, which produces most of its thermal coal in the PRB, said last week rail bottlenecks there are limiting its sales.

Boyce said Peabody will be “very well positioned” when the coal cycle does eventually turn. He doesn’t expect the company to buy up competitors or low-priced mining assets until coal prices start to rebound, he said.

“Right now, there are no tier-one assets on the market, because the people that have them, they’re not interested in selling at the bottom of the cycle,” he said.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s