TORONTO (miningweekly.com) – The US's second largest coal producer Arch Coal has filed for Chapter 11 bankruptcy protection, finally buckling under a heavy debt load and a falling coal price after it failed to turn a quarterly profit since 2013.
As the company’s operational success is closely linked to global demand for coal-fuelled electricity and steel, its average sales price fell 19% from the third quarter of 2013 to the third quarter last year, as coal came under increasing pressure from stricter pollution controls, falling demand from China and increasing competition from natural gas.
The NYSE-listed company took on significant debt when it acquired International Coal Group (ICG) in June 2011, in a deal valued at $3.4-billion, excluding costs associated with the redemption of ICG's outstanding debt and fees related to the transaction.
“Despite the many proactive steps the debtors have taken over the last several years to enhance the efficiency of their operations and to focus on high-return opportunities, the debtors’ highly leveraged capital structure, consisting of more than $5-billion in outstanding indebtedness and about $360-million in annual debt service, cannot be sustained in the current depressed coal market," said Arch CFO John Drexler in a filing with the US Bankruptcy Court in St Louis on Monday. Drexler added that, over the past several years, a confluence of economic challenges and regulatory hurdles had hobbled the coal industry.
Arch stated that it had reached an agreement with senior lenders to swap debt for equity that would eliminate more than $4.5-billion in debt from Arch's balance sheet.
The company believes it has enough cash to continue its normal mining activities and to meet its ordinary obligations. Arch also expects that its mining operations and customer shipments will continue uninterrupted throughout the reorganisation process.
The company had more than $600-million in cash and short-term investments as of Monday, and expected to receive $275-million in debtor-in-possession (DIP) financing from its senior lenders.
"After carefully evaluating our options, we determined that implementing these agreements through a court-supervised process represents the best way to solidify our financial position and strengthen our balance sheet. We are confident that this comprehensive financial restructuring will further enhance Arch's position as a large-scale, low-cost operator," stated Arch chairperson and CEO John Eaves.
"Since the market downturn, we have taken many steps to enhance the efficiency of our operations and to strengthen our asset base. As a result, all of our operating segments were cash-flow positive during the first three quarters of 2015,” he added.
In its efforts to overcome the market difficulty, Arch had reduced output, wages and prices and its dividend. The company was widely expected to go bankrupt after ending a previously proposed debt swap with lenders in October, and deferring a $90-million interest payment due in December.
Falling prices and tighter legislation have wreaked havoc on the North American coal industry in recent times, forcing other major players, such as Walter Coal, Patriot Coal and Alpha Natural Resources, to file for bankruptcy.
Arch’s NYSE-listed stock was more than halved before being suspended from trading on Monday, and will be delisted after it emerges from the 12-to-18-month restructuring process.
Arch’s bankruptcy on Monday dragged other coal producers down, including Peabody Energy, which lost 20%; Consol Energy, which lost 10%; Yanzhou Coal Mining, which was down 2.3%; and Cloud Peak Energy, which was down 10.87%.