Company overview: Arch Coal Inc. (Part 9 of 9)
Arch Coal’s financial health
It is extremely worrying to see that Arch Coal is both borrowing more money and raising cash by selling their non-core assets. Both moves are going to help the company’s cash balance sheet, but is the company in such dire straits that it has to sell off its own assets which could be generating revenue in the future in addition to raising cash from borrowing more debt? Or is the management team just taking a very safe approach to ride out the weaker coal market and position themselves for the opportunities that may come. This is definitely something to look out for as an investor.
In December 2013, Moody’s reaffirmed its secured debt rating of Arch Coal, senior unsecured debt rating of Caa1 and Corporate Family Rating of B3. The rational for these ratings are due to declining performance with the weaker coal market and with limited potential of recovery. Also, the company’s high level of debt puts it in a precarious position should conditions become worse. Moody has also given Arch Coal’s liquidity a rating of SGL-2 signifying that they have no worries about Arch Coal’s ability to maintain a positive liquidity position due to its $1.5 billion in liquidity on their balance sheets.
The demand for coal is very dependent of electricity consumption globally and a reduction in consumption would negatively affect companies in this industry. Both demand for thermal and metallurgical coal would drop as there would be less infrastructure development and less production globally.
Even though Arch Coal claims that their production of coal is well within regulation guidelines, a potential change in regulations could negatively impact their operations. Globally, the demand for cleaner and cheaper energy could force Arch Coal to come up with more innovative ways to produce cleaner coal. Failure to do so will be detrimental for the business.
The management of Arch Coal is confident that the coal market conditions are going to improve over the next 12 months and that their recent 3 rd quarter results are a good representation of their ability to manage costs. In general, the management of Arch Coal has taken very cautious steps to mitigate the impacts of the weaker coal markets. It is unfortunate that they operate under conditions that are unforeseeable and can only try to prepare themselves for the future opportunities.
This report does not take into account and is not reflective of the Fourth Quarter and Full Year 2013 results Arch Coal has posted on February 4 th , 2014. An earnings report will be posted in the next week addressing the updated results.
Browse this series on Market Realist:
- Part 1 - A handy investor guide to Arch Coal (ACI)
- Part 2 - Where does Arch Coal mine and what are the implications?
- Part 3 - How does Arch Coal earn revenue and free cash flow?
- Commodity Markets
- Arch Coal