Arch Coal Reports Loss, Revs Grow

Zacks

Arch Coal Inc. (ACI) reported pro forma loss of 10 cents per share in second quarter 2012, in contrast to earnings of 44 cents per share in the year-ago comparable period.

This was primarily due to lower sales volume related to decline in shipments from Powder River Basin (“PRB”) operations. The reported loss was, however, narrower than the Zacks Consensus Estimate of a loss of 18 cents per share.

Second quarter 2012 GAAP loss was $2.05 per share versus earnings of 4 cents in the year-ago quarter.

The variance between quarterly pro forma and GAAP loss was the result of a gain of 2 cents related to amortization of acquired sales contracts, tax adjustment gain of $1.15, charges of $2.48 associated with mine closure and asset impairment, goodwill impairment charges of 55 cents, and other non-operating charges of 9 cents.

Total Revenue

Arch's total revenue in the reported quarter was $1,063.5 million, up 8% from $985.5 million in the year-ago quarter. Quarterly revenue surpassed the Zacks Consensus Estimate of $1,020 million.

Operational Update

Arch Coal sold 31.5 million tons of coal in the reported quarter, down 14.2% year over year from 36.7 million tons. This decrease in sales volume was due to a 22.1% year over year decline in PRB operations and a 15% dip in Western Bituminous Region sales volume, partially offset by 36.8% year over year growth in Appalachia mining operations.

Despite a reduction in the coal sales volume in the reported quarter, total revenue increased on the back of 15.3% year over year growth in the sales price per ton of coal.                

Arch’s adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) in second quarter 2012 were $181 million, a decline of 27% from $248 million in the year-ago period.

Interest expenses were $77.6 million as of June 30, 2012 compared with $41.5 million in the year-ago period.

Financial Update

Cash and cash equivalents of the company as of June 30, 2012 were $512.5 million versus $138.1 million as of December 31, 2011.

As of June 30, 2012, Arch’s long term debt was $4.5 billion compared with $3.8 billion as of December 31, 2011.

Capital expenditure in second quarter 2012 was $202.1 million, up from $107.7 million reported in the year-ago period.

Guidance

In 2012, the company expects to sell 135.5–141.5 million tons of coal, which includes 128 – 134 million tons of thermal coal and 7.5 million tons of metallurgical coal.

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

Interest expenses are expected to be in the range of $305 – $315 million in 2012.

The company’s capital expenditure in 2012 will likely be in the range of $410 – $430 million.

Peer Update

Arch Coal's primary competitor, Peabody Energy Corporation (BTU) announced second quarter 2012 earnings of 73 cents per share compared with $1.16 per share in the year-ago quarter. Its quarterly earnings significantly beat the Zacks Consensus Estimate of 53 cents.

Peabody’s second quarter 2012 revenue was $1,998.2 million versus $1,980.5 million in the prior-year quarter. The reported revenue lagged the Zacks Consensus Estimate of $2,067 million.

Our Take

We have seen that Arch Coal strongly follows cost reduction measures. In the second quarter of 2012, the company ceased operations at higher-cost thermal mining complexes and minimized production at several mines in Appalachia.

In addition, Arch plans to curtail its cost of operations, decrease headcount, and realign its asset portfolio. This will enable the company to focus on its higher-margin metallurgical assets and maintain low-cost thermal coal operations to serve its domestic and international customers.

We expect higher coal demand in second half of 2012 related to higher U.S. power demand, reduction in coal-to-gas switching related to gradual increase in natural gas prices and growing U.S. coal exports attributable to higher demand from China and India.

However, we are concerned about declining global steel production. Steel production volumes have been adversely impacted owing to lower production and utilization rates in the manufacturing sector and heavy industries, as evident from the declines in Europe in June 2012 and the US in July 2012.

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. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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