Must know: Is Arch’s portfolio realignment a possible reset button?

Market Realist

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

(Continued from Part 3)

High liquidity position

Over the past few years, the management at Arch is realigning to a portfolio that is built for the long-term growth for its shareholders. It has been actively divesting mines that were not in line with its core portfolio which is to focus production on the lower cost mines and outputs toward its higher margin metallurgical markets. The company’s recent sale of Canyon Fuel Mine for $423 million and the cash tender offers raised its liquidity to over $1.5 billion of which $1.2 billion is cash, putting it in a position that might be advantageous to capitalize on opportunities should the coal market recover.

In our previous company overview article on Arch Coal, we mentioned in depth about the precarious financial position that Arch Coal is currently in, of which has been recently affirmed by Nomura’s target price cut on Arch Coal from $4 to $3 after the earnings call. The company’s reasoning behind the price cut is due to the weaker than forecasted metallurgical volume and expected losses continuing its eight-quarter losses streak. This is despite Arch’s prediction of significantly lower capital spending and additional revenue from the new Leer mine.

Depressed stock price

The management of Arch Coal has seen its stock price spiral into a free fall in the past three years in line with its competitors due to declining revenues and negative profits. It would be interesting to see how the company performs given the management’s positive outlook for 2014. Arch Coal could emerge a strong winner within a portfolio should the coal market recover, if only what the management team at Arch has done is enough to put the company in an advantageous position to ride out the weak market and to capitalize on opportunities when they arise; or whether these are just painstaking efforts to barely survive the extremely weak coal markets.

For a full company overview on Arch Coal, please see A handy investor guide to Arch Coal.

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