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Arch Coal expects to weather global coal pullback

US-based Arch Coal says its first-quartile cost profile has it well positioned to weather further coal market pullback.
Arch Coal expects to weather global coal pullback Arch Coal expects to weather global coal pullback Arch Coal expects to weather global coal pullback Arch Coal expects to weather global coal pullback Arch Coal expects to weather global coal pullback

Arch Coal expects to weather global coal pullback

The company's confidence comes amid several recent mine closures and bankruptcies as the industry grapples with slowing steel demand, trade wars and concerns over slower global economic growth.

Arch said global coking coal output remained flat. In the US, several high-cost coking coal mines have been idled in recent weeks in response to the lower pricing environment, and US coking coal exports are down 11% year-to-date.

Australian production is up only modestly and continues to undershoot the peak levels achieved in 2016, while other major coking coal producers continue to budget very limited capital for expansion projects.

"Supply and demand appear only modestly out of balance at present, and high-cost production is being taken off line. With its first-quartile US cost structure, Arch is well-positioned to weather the current pull-back," Arch Coal said.

Arch emerged from Chapter 11 bankruptcy protection in October 2016, having scrubbed almost $5 billion in debt from its balance sheet and left bankruptcy with $300 million in cash.

The St Louis, Missouri-headquartered major on Tuesday reported September-quarter earnings that showed a 13% year-on-year drop in net profit to US$106.8 million, or $6.34 per share.

Revenues in the period dipped 2% year-on-year to $620 million.

"During the quarter, Arch again exhibited operational excellence and generated strong cash flows across its operating platform despite a pull-back in coking coal prices," said CEO John Eaves.

"Our core metallurgical segment turned in an excellent cost performance, overcoming elevated costs in the final longwall panel at the Mountain Laurel mine, and our legacy thermal segments generated five times more cash than they expended in capital."

Q3 sales in the company's primary coking coal business gained 12% year-on-year to 1.9 million short tons, up by 200,000t year-on-year and 300,000t higher than the prior period.

Arch realised third-quarter pricing of $105.72/t for coking coal sales, based on a cash cost of $64.89/t, which was down from $131.91/t in the prior quarter and $114.89/t in the third quarter of 2018.

The company confirmed its full-year production guidance of 6.7-7.1Mt at a cost of $61-65/t. However, it flagged potentially lower realised prices in the current quarter "due to lower average projected index-based pricing".

Arch added it had secured 1.5Mt of coking coal sales to domestic buyers in 2020 at $110/t.

"As we have stated in the past, we see value in maintaining a meaningful presence in the North American marketplace and believe we have secured pricing - given current market conditions - that is reflective of the premium quality of our products," COO Paul Lang said.

Arch has also committed 1.6Mt into the seaborne market with an index-based pricing structure, bringing total commitments for 2020 to 3.1Mt. The average price of Arch's premium HVA coking coal declined from an average of nearly $200 per metric tonne in the ocean vessel during the year's first half to under $140 per metric tonne at the end of the third quarter, according to Platts.

In Wyoming's Powder River Basin, sales volumes surged 30% over the prior quarter to 22.2Mt. Per-unit cash costs fell to $9.77/t compared with $11.29/t in the flood-impacted second quarter. The segment's per-ton cash margin increased by more than $1.50 to $2.25, compared with the second quarter.

Arch expects reduced volumes and correspondingly higher unit costs in the fourth quarter. Even with those expected pressures, the company reduced its per-ton cash cost guidance range to between $10.60-$10.80 for 2019.

Meanwhile, Arch continued to expand production and has taken advantage of the weakness in the US coal sector to acquire assets.

Arch has budgeted to spend $360-390 million to develop the Leer South mine, which will add about 3Mt of High-Vol A coking coal to its portfolio. Longwall mining at Leer South was scheduled to start in the third quarter of 2021, Arch said.

The company also signed a definitive agreement last month to acquire 20Mt of HVA coking coal reserves directly next to its Leer mine from Kentucky-based coking coal miner Blackhawk Mining. The deal is expected to close in the fourth quarter, adding nearly 24Mt in reserves to Arch's Leer mine and extending the life of the mine to the late 2030s, with the potential for further extensions.

Analysts at ratings agency Moody's Investors Service said Arch put in a solid performance during the most recent quarter. "Arch Coal's strong third quarter reflects the company's focus on metallurgical coal, solid execution, and aggressive shareholder returns," said VP and senior credit officer Benjamin Nelson.

"However, with metallurgical coal prices moving down meaningfully over the past few months and a significant open contract position in 2020, we will be very focused on the company's ability to generate free cash flow in a lower pricing environment and plans to fund the Leer South project."

Despite a 15% gain the past 30 days, Arch shares trading in New York (NYSE:ARCH) are trending 11% below the year-ago level at $82.90. The company has a market capitalisation of $1.3 billion.