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Arch Coal widens loss as tough coal market conditions persist

30th July 2015

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – US coal producer Arch Coal has widened its second-quarter loss to $168-million, or $0.79 a diluted share, as it was grappling with one of the worst coal market downturns in history.

For the quarter ended June 30, the company recorded a $19.1-million impairment charge and incurred $4-million in expenses related to an exchange transaction. This compared with a net loss of $96.86-million, or $0.46 a share, in the comparable period a year earlier.

Excluding asset impairments, expenses related to debt restructuring and amortisation of sales contracts, Arch's second-quarter adjusted net loss was $0.73 a diluted share, much wider than analyst forecasts of an adjusted net loss of $0.54 a share and when compared with an adjusted net loss of $0.46 a diluted share in the same quarter of 2014.

Revenues for the period fell almost 10% year-on-year to $644-million and adjusted earnings before interest, taxes, depreciation, depletion and amortisation were $45-million, compared with $64.9-million a year earlier. The company ascribed the poorer performance to lower metallurgical coal prices and output when compared with the prior-year period.

"Arch continues to weather the significant market challenges facing the industry. Even with the lowest shipment level experienced by Arch in more than five years and shipping challenges in the Powder River basin (PRB), our operations continued to do an outstanding job of managing costs in this environment. In fact, all of our operating regions were cash-flow positive during the first half of this year, a position we think sets us apart from our competitors," Arch chairperson and CEO John Eaves noted.

He added that the company’s repositioned portfolio of large-scale, low-cost thermal operations in the PRB and competitive metallurgical coal operations in Appalachia were designed to help it continue to navigate the challenging market environment.

As at the end of the quarter, Arch had a liquidity position of about $812-million, with nearly $690-million of that liquidity in the form of cash and short-term investments. The company had no borrowings under its revolving credit facility and had no long-term debt maturities due until mid-2018.

Arch continued to focus on controlling costs and capital spending through the market downturn and had reduced its capital and administrative spending expectations by a further $27-million for the full year.

"These targeted savings align with our overall focus to prudently manage production levels and costs in the face of one of the worst coal market downturns in history,” VP and CFO John Drexler emphasised.

The company managed to maintain per-ton costs in the PRB despite lower volumes and the bituminous thermal operations continued to drive down costs. Arch’s Appalachian mines experienced higher costs mainly owing to two expected longwall moves during the quarter.

TURBID OUTLOOK
Despite economic recovery and a return to normal temperatures boosting electricity demand, Arch said coal's share of generation had eroded in the face of low natural gas prices and the impact of the Mercury and Air Toxics Standards regulations.

According to the Energy Information Administration, gas's share of generation in April eclipsed that of coal for the first time on record and gas prices remained mired below $3 for every one-million British thermal units.

As a result, Arch continued to expect a decrease in domestic utility coal consumption of 80-million tons this year.

However, while domestic coal demand was down, US producers were starting to respond. Based on preliminary Mine Safety and Health Administration data, stockpile data and various mine idling announcements, Arch now expected coal output to fall by more than 90-million tons this year over 2014.

While the company expected coal stockpiles to remain higher for some time, strong supply rationalisation could lead to a better domestic thermal market in the future.

Internationally, the seaborne market remained challenging. The Australian dollar had weakened appreciably against the US dollar and Australia's coking coal benchmark recently settled at $93/t, the lowest since 2004. Thermal prices remained under considerable pressure as well.

Given challenging market conditions, Arch had lowered the high end of its thermal guidance and now expected thermal sales volumes for 2015 to be in the range of 120-million tons to 124-million tons.

Nevertheless, Arch's NYSE-listed stock on Thursday climbed as much as 24% to $0.21 in early morning trading.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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