Arch Coal optimistic about future metallurgical coal demand

Market Realist

Arch Coal’s 4Q and full year 2013 report (Part 3 of 4)

(Continued from Part 2)

Challenging times ahead

Despite anticipating a challenging market condition on the metallurgical side in 2014, it is clear that Arch Coal, Inc. strongly believes metallurgical coal is the way to go in the long run. Arch’s long term strategy is to be a dominant player in the coking coal market. So, Arch’s addition of Leer mine which is expected to produce over 3 million tons of coal yearly, of which 70% is expected to be coking coal, is crucial to its long-term strategy. Leer mine is poised to be advantageous due to its good quality coal and strategic access to the seaborne markets. To date, about half of the tons that will be produced by Leer are already committed on the market. So, going forward, Arch’s metallurgical platform will be served by its low cost long walls at Leer and Mountain Laurel. Previously, Arch sold 7.5 million tons of metallurgical-quality coal in 2012 and 7.4 million tons in 2011. Now, with the added production of metallurgical coal from Leer mine, we can expect to see Arch generate more revenue from its metallurgical segment.

In 2012 and 2011, Arch collected $86.6 million (35%) and $117.4 million (31%) of its total trade receivables, respectively. The reason why metallurgical coal represents such a significant portion of the company’s revenue despite the small number of tons it sells per year is mainly due to the large price difference between thermal and metallurgical coal. We previously mentioned in our company overview on Arch Coal that the company has invested over $400 million to date on the Leer mine and expects to receive a significant return on its investment over the next few years.

Reduction in capital spending

With the slowing demand of coal, Arch is forced to reduce its costs in order to mitigate the lower revenues recorded from low coal prices. Over the past three years, Arch has successfully lowered its capital spending by almost half. For full year 2014, the management team expects to lower capital spending by a further $100 million to a range of $180 to $200 million as compared to 2013. This is possible as over $100 million of 2013’s capital spending is attributed to the completion of Leer mine.

Continue to Part 4

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