Arch Coal’s cost structure and operating conditions

Market Realist

Company overview: Arch Coal Inc. (Part 7 of 9)

(Continued from Part 6)

Operating Conditions

With regard to operating costs in mining, Arch Coal has successfully reduced mining costs in many of their mines by improving the efficiency of their operations. Such methods have involved minimizing the loads carried by the trucks to reduce wear and tear, reducing labor cost, downsizing idle operations and upgrading technology. Over the past year, Arch has managed to reduce their cost per ton mined in the Powder River Basin by $1.15 and Appalachia Region by $3.36. In total, Arch has reduced its total capital expenditures by almost half since 2011. This reduction has helped them short up cash against the tougher coal market conditions. Their average cost to mine for all three mines has increased over the past 5 years and is a factor as to why the company is facing lower margins.

How they fare against their competitors

Due to the challenging coal market conditions, most of the coal mining companies have struggled to maintain past profit margins. Coal companies are typically price-takers and the only way for companies to maintain their profit margins in weaker coal market conditions are to cut costs. In 2012, the average profit margin for the world’s top 40 mining companies was 13%. However, Arch Coal has severely underperformed its competitors with a profit margin of -16.45% in fiscal year 2012. This was mainly due to a one time impairment of $346mm for goodwill and $523mm in costs relating to closing certain mining operations in the Appalachia Region. The coal mining industry itself has taken a huge hit during the past few years due to the switch to the cheaper natural gas alternative.

Continue to Part 8

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