Must-know: Why the steam coal business keeps Arch Coal hot

Market Realist

Assessing Arch Coal's 2Q14 earnings and cost-saving measures (Part 3 of 6)

(Continued from Part 2)

Arch Coal’s steam coal business

While Arch Coal’s (ACI) metallurgical coal business saw production cuts and lower realizations, the company’s steam coal business is helping it hold on in the current difficult environment.

The revenue per ton for the company’s Powder River Basin (or PRB) coal is up to $12.79 in Q2 2014 compared to $12.56 a ton for Q2 2013. John Eaves, President and CEO or Arch Coal, said, “Western coal remains in the money compared with current natural gas prices and coal stockpiles at generators are on the low end in some cases, well below targeted levels.”

The company has raised production at its West Elk mine to 6 million tons—close to its capacity. Overall, the company sold 26.9 million tons of PRB coal in Q2 2014 compared to 25.7 million tons in Q2 2013, a 4.7% increase.

The obstacles

Disruption in rail connectivity in PRB and cooler summers are two key issues management highlighted that could affect the shipments of coal from the company’s PRB mines in 2014. So the company may not be able to ship all its contracted coal in 2014. Part of the coal shipments contracted for 2014 may roll over in 2015.

The company expects to sell 124 million to 130 million tons of thermal coal in 2014—down from its original guidance of 124 million to 134 million tons. The impact of lower revised guidance is minimal, as the mid-point has shifted only 2 million tons. At current prices, selling additional coal isn’t a cash flow–positive decision anyway. It’s worth noting that the company’s burnt cash over the last few quarters due to a difficult industry environment.

Other major coal producers (KOL) operating out of PRB include Cloud Peak Energy (CLD), Peabody Energy (BTU), and Alpha Natural Resources (ANR).

Saving costs

Apart from better realization for thermal coal, Arch Coal’s cost-saving measures have resulted in lower-than-expected losses. Read on to learn about these measures in detail.

Continue to Part 4

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