Arch Coal Falls Short of Estimates

Zacks

Arch Coal Inc. (ACI) reported pro forma loss of 4 cents per share in first quarter 2012, in contrast to earnings of 36 cents in the year-ago comparable period. The reported figure also fell way short of the Zacks Consensus Estimate of earnings of 17 cents.

The first quarter 2012 GAAP earnings were 1 cent versus 34 cents in the year-ago quarter.

The variance between quarterly pro forma and GAAP earnings was due to amortization of acquired sales contracts gain of 7 cents and tax adjustment charge of 2 cents.

Total Revenue

Arch's total revenue of $1,039.7 million in the first quarter 2012 missed the Zacks Consensus Estimate of $1,161 million. The quarterly revenue improved from the year-ago figure of $873 million, reflecting higher sales prices.

Operational Update

Arch sold about 35.5 million tons of coal in the reported quarter, down 2% year over year from 36.2 million tons. This decrease in sales volume were attributable to 5.5% year-over-year decline in Powder River Basin (“PRB”) operations and a 21.4% dip in Western Bituminous Region sales volume, partially offset by 40.6% year-over-year improvement in Appalachia mining operations. 

In first quarter 2012, total operating cost per ton increased 30% driven by an operating cost per ton increase in PRB and Appalachia, partially offset by a decline in operating cost per ton in Western Bituminous Region.

Arch’s adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) in first quarter 2012 were $180 million, a decline of 6.1% from $191 million in the year-ago period.  

Interest expenses were $74.8 million as of March 31, 2012 compared with $34.6 million in the year-ago period.

Financial Update

Cash and cash equivalents of the company as of March 31, 2012 were $117.8 million versus $138.1 million as of December 31, 2011.

Capital expenditure in first quarter 2012 was $93.3 million, up from $38.7 million reported in the year-ago period.

Guidance

In fiscal 2012, the company expects to sell 136 – 142.5 million tons of coal in total, which includes 128 – 134 million tons of thermal coal and 8 – 8.5 million tons of metallurgical coal.

In fiscal 2012, selling, general and administrative (“SG&A”) expenses is expected to be in the range of $125 – $135 million.

Interest expenses are expected to be in the range of $290 – $300 million in fiscal 2012.

The company’s capital expenditure in 2012 will likely be in the range of $410 – $440 million.

Peer Update

Arch Coal's primary competitor, Peabody Energy Corporation (BTU), announced first quarter 2012 earnings of 67 cents per share compared with 72 cents in the year-ago quarter. The quarterly earnings significantly beat the Zacks Consensus Estimate of 56 cents.

Peabody’s first quarter 2012 revenue was $2.04 billion versus $1.7 billion in the prior-year quarter. The reported revenue lagged the Zacks Consensus Estimate of $2.12 billion.

Our Take

The company failed to meet our revenue and earnings expectations in the reported quarter due to decline in natural gas prices and weak U.S. coal consumption because of adverse weather conditions. The company is planning to reduce fiscal 2012 coal production to maintain supply-demand equilibrium.

But we believe that demand for coal in Asian and Central & South American markets -- principally Japan, China, India and Brazil -- will act as a positive catalyst for the company’s future growth, given the significant increase in power generation and steel production in these regions. Along with this, newly acquired International Coal Group, which produces metallurgical coal through its assets in the Appalachian region, is expected to strengthen Arch’s portfolio.

Based in St. Louis, Missouri, Arch Coal Inc. engages in the production and sale of steam and metallurgical coal. The company also ships coal to domestic and international steel manufacturers as well as international power producers. Arch Coal Inc. retains a Zacks #4 Rank, which translates into a short-term Sell rating.

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