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Arch Resources, Inc. -- Moody's downgrades Arch Resources' CFR to B2 from B1; outlook is stable

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Rating Action: Moody's downgrades Arch Resources' CFR to B2 from B1; outlook is stable

Global Credit Research - 03 Dec 2020

New York, December 03, 2020 -- Moody's Investors Service ("Moody's") downgraded Arch Resources, Inc.'s ("Arch") Corporate Family Rating ("CFR") to B2 from B1 and senior secured ratings to B2 from B1. The Speculative Grade Liquidity Rating is unchanged at SGL-2. The rating outlook is stable.

"Arch remains committed to starting production at Leer South in the third quarter of 2021. Given recent weakness in global metallurgical coal pricing and significant competitive issues in the Powder River Basin thermal coal production region, Moody's expects that the company will have higher net debt balances when the project is completed," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Arch Resources, Inc.

Downgrades:

..Issuer: Arch Resources, Inc.

.... Corporate Family Rating, Downgraded to B2 from B1

.... Probability of Default Rating, Downgraded to B2-PD from B1-PD

....Senior Secured Bank Credit Facility, Downgraded to B2 (LGD4) from B1 (LGD4)

..Issuer: WEST VIRGINIA ECONOMIC DEVELOPMENT AUTHORITY

....Senior Secured Revenue Bonds, Downgraded to B2 (LGD4) from B1 (LGD4)

Outlook Actions:

..Issuer: Arch Resources, Inc.

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

Moody's expects a challenging conditions for the coal industry will extend into 2021 following a very difficult 2020 driven by the global outbreaks of Coronavirus. Domestic demand for thermal coal, particularly in the Power River Basin region, is constrained by falling demand for coal for power generation and high inventory levels. Moody's believes this region will remain oversupplied in 2021. Domestic and international demand for metallurgical coal is recovering heading into 2021 but pricing remans weak and recent disruption in the seaborne market is compounding the situation.

Moody's downgraded Arch's rating to reflect substantive weakening in credit metrics and low likelihood of meaningful improvement in the first half of 2021. Moody's expects that the company's EBITDA will fall below $50 million in 2020 and, based on export metallurgical coal pricing moving toward the midpoint of Moody's range of $100-160 per metric ton (CFR Jingtang), improve into the range of $125-175 million in 2021. Moody's expects that the company will burn cash and adjusted financial leverage will increase above 10 times (Debt/EBITDA) by the end of 2020. Capital spending for the Leer South project will remain elevated over the next few quarters and result in a meaningful increase in net debt from substantially no net debt at the end of 2019 to more than $400 million by the third quarter of 2021.

Moody's believes that investor concerns about the coal industry's ESG profile are intensifying and coal producers will be increasingly challenged by access to capital issues, especially in North America. An increasing portion of the global investment community is reducing or eliminating exposure to the coal industry with greater emphasis on moving away from thermal coal. The aggregate impact on the credit quality of the coal industry is that debt capital will become more expensive over this horizon, particularly in the public bond markets, and other business requirements, such as surety bonds, will together lead to much more focus on individual coal producers' ability to fund their operations and articulate clearly their approach to addressing environmental, social, and governance considerations.

The B2 CFR reflects a diverse platform of eight coal mining assets in the United States capable of strong cash flow generation. The company's approach to maintaining low debt levels and a significant liquidity cushion helped the company withstand difficult industry conditions despite severe earnings compression. Operational risk is a constraint, with meaningful concentration of earnings and cash flow at two specific mining sites: Black Thunder thermal coal mine in the Powder River Basin and Leer mining complex in Northern Appalachia. Credit quality is constrained more significantly by the inherent volatility of the global metallurgical coal industry, ongoing secular decline in the US thermal coal industry, and ESG factors. The rating also takes into consideration that some mining assets have less favorable operating prospects in the coming years and, therefore, could be subject to more significant reclamation-related spending over the rating horizon.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The SGL-2 reflects our expectation for good liquidity to support operations over the next 12-18 months. Moody's expects that the company will burn cash in 2020 due to heavy expansionary capital spending on the Leer South mine project. The primary source of liquidity beyond internally-generated free cash flow is the company's cash balance combined with modest availability under an accounts receivables securitization facility and an unrated inventory-based revolving credit facility. Arch's recent issuance of convertible notes helped bolster available liquidity to about $400 million. The SGL rating could be downgraded to SGL-3 if available liquidity falls below $250 million.

Environmental, social, and governance factors are important factors influencing Arch's credit quality. The company is exposed to ESG issues typical for a company in the coal mining industry, including increasing global demand for renewable energy that is detrimental to demand for thermal coal, especially in the United States and Western Europe. From an environmental perspective, the coal mining sector is also viewed as: (i) very high risk for air pollution and carbon regulations; (ii) high risk for soil and water pollution, land use restrictions, and natural and man-made hazards; and (iii) moderate risk for water shortages. Social issues include factors such as community relations, operational track record, and health and safety issues associated with coal mining such as black lung disease. Through capital investment in the Leer South project, Arch Resources has been reducing exposure to thermal coal, which carries greater ESG-related risks, and increasing exposure to metallurgical coal, which carries lower ESG-related risks. Arch Resources sold its last thermal coal mine in Appalachia in December 2019 -- a surface mine called Coal-Mac -- and has signaled an intention to reduce emphasis on thermal coal mining in other regions. Governance-related risks are representative of a publicly traded coal company with an ongoing emphasis on maintaining balance sheet cash and good liquidity. However, Arch returned more than $900 million of cash to shareholders since 2017 and the decision to increase debt levels to complete the Leer South project is deemed as financially aggressive. Arch also reported $529 million of reclamation-related surety bonds and $114 million of surety bonds for other obligations.

The stable outlook balances expectations for continued earnings compression and weak credit metrics with the company's substantial liquidity position. Moody's could downgrade the rating with further weakness or lack of recovery in metallurgical coal pricing, expectations for available liquidity to fall below $175 million, or any meaningful operational issues at the company's Black Thunder or Leer mines. Moody's could upgrade the rating with expectations for free cash flow generation above $100 million, meaningful debt reduction, and financial policies consistent that support maintaining a low net debt position in the medium-to-long term.

Arch Coal is one of the largest coal producers in the United States. The company has two mining complexes in the Powder River Basin, four mining complexes in Appalachia, and two more mines in Illinois and Colorado. The company generated about $2.3 billion of revenue in 2019.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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Benjamin Nelson VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Glenn B. Eckert Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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