Arch Coal, Inc. Reports Second Quarter 2017 Results

 

 

July 27, 2017 - Arch Coal, Inc. (NYSE: ARCH) today reported second quarter 2017 net income of $37.2 million, or $1.48 per diluted share, compared with $51.7 million, or $2.03 per diluted share, in the first quarter of 2017. Excluding certain charges, adjusted diluted earnings per share ("adjusted EPS") 1 was $1.85. The charges for the second quarter include non-cash sales contract amortization, reorganization expenses and early debt extinguishment charges and related tax impact. The company earned adjusted earnings before interest, taxes, depreciation, depletion, amortization, reorganization items and early debt extinguishment charges ("adjusted EBITDAR") of $95.4 million in the second quarter of 2017.

Revenues totaled $549.9 million for the three months ended June 30, 2017, representing a sequential decline and reflective of the timing of sales in the metallurgical segment as well as anticipated reduced shipment levels in the Powder River Basin typical of the shoulder season.

"While extreme volatility in global metallurgical markets delayed the timing of second quarter spot sales, Arch continued to generate strong free cash flow, execute its operational strategy and make progress on many fronts," said John W. Eaves, Arch's chief executive officer. "Since the last update, Arch returned nearly $60 million to shareholders through share repurchases and quarterly dividends; further streamlined its operational structure with the announced sale of the Lone Mountain complex and two other idled facilities; and capitalized on favorable dynamics in seaborne thermal markets. Looking ahead, we are confident in our strengthened annual guidance for coking coal sales, and we continue to execute on our strategic priorities and return capital to shareholders."

Capital Allocation Progress and Financial Position

During the second quarter, Arch utilized its healthy cash generation to repurchase 711,000 shares of common stock, representing 2.8 percent of shares outstanding, at a total cost of $51 million and an average price of $71.82 per share. At quarter-end, $249 million remained available in the current share repurchase authorization. As previously announced, the share repurchase plan has no time limit.

"We continue to be optimistic about the company's strong long-term prospects," said John T. Drexler, Arch's chief financial officer. "We fully expect to continue to make significant and ongoing purchases under the existing authorization during the remainder of 2017."

In addition, the company paid $8.6 million in cash dividends to shareholders during the second quarter of 2017. The next quarterly cash dividend payment of $0.35 per common share was approved by the board of directors, and will be paid on September 15, 2017 to stockholders of record at the close of business on August 31, 2017.

Future dividend declarations and share repurchases will be subject to ongoing board review and authorization and will be based on a number of factors, including business and market conditions, Arch's future financial performance and other capital priorities.

Including the impact of the share repurchases and dividends, Arch's cash and short-term investment balance grew by $23 million from the end of the first quarter 2017 to over $490 million at June 30, 2017. At quarter-end, Arch's debt level totaled $330 million, inclusive of the term loan, equipment financing and other debt.

Arch Executes Sale of Lone Mountain Complex

On July 21, 2017, Arch signed a definitive agreement to sell its wholly-owned subsidiary, Lone Mountain Processing Company, LLC. ("Lone Mountain"), to Revelation Energy, LLC ("Revelation") for $8.3 million. The sale includes the Lone Mountain complex as well as two other idled properties in Central Appalachia. Revelation will assume responsibility for all reclamation liabilities and final mine closure expenses for the properties.

"While we have been successful in placing Lone Mountain's products in domestic thermal and pulverized coal injection (PCI) markets, margins have been thin or negative in recent months in the face of cost pressures," said Eaves. "This strategic divestiture will further streamline and strengthen Arch's key metallurgical segment and allow the company to deepen its focus on its four core coking coal operations."

As a result of the sale of the company's highest-cost Appalachian operation, Arch expects the cost structure of its metallurgical segment to benefit over time. After customary working capital adjustments, the company expects to record a pre-tax gain of approximately $15 million to $20 million related to the sale of Lone Mountain. Closing of the transaction is subject to customary closing conditions and is expected to occur within the next 60 days.

Arch's Commitment to its Fundamental Values

Arch continued to deliver industry-leading safety and environmental performances in the second quarter of 2017. Arch's total-incident rate for the first half of 2017 was more than three times better than the national coal industry average. Arch also achieved a perfect environmental compliance record for the period. Notably, the Coal Creek operation was recognized with the Rocky Mountain Coal Mining Institute regional safety award. This is the fifth time Coal Creek has received this prestigious honor.

"We congratulate our mine personnel for continuing to earn external recognition for outstanding safety and environmental performances," said Paul A. Lang, Arch's president and chief operating officer. "In addition, three operations attained A Perfect Zero - a dual goal of operating without a reportable safety incident or SMCRA environmental violation - in the second quarter. These achievements exemplify our constant commitment to operating in a safe and environmentally responsible manner. We commend the hard work and focus of our employees in these critical areas of performance."

Arch's Operational Results

"During the second quarter, Arch's mining complexes ran well and each operating segment delivered solid cash flow," said Lang. "Good cost control and judicious capital spending are top priorities at Arch, and we are currently expecting to deliver strong operational results in the year's second half. At the same time, we are working to opportunistically and selectively place our uncommitted volume, with the objective of enhancing future profitability."

In the Metallurgical segment, Arch delivered solid cash margins despite limited spot buying activity in seaborne metallurgical markets during much of the quarter. Average coking coal realizations continued to benefit from strong pricing on index-linked tons that priced in the second quarter, but were offset to some degree by an increased percentage of annual fixed-priced tons that shipped during the period. Higher per-ton cash costs in the segment were driven mainly by higher costs at the Lone Mountain complex and challenging operating conditions in the last panel of the Alma seam at the Mountain Laurel complex. Excluding Lone Mountain, segment cash costs for the second quarter would have been $57.15 per ton - which, while higher than the expected cash costs in the year's second half, would still place Arch well below the average cost structure for the U.S. metallurgical coal industry. Due to the outlook for increased coking coal volumes in the back half of the year, Arch remains confident in its 2017 cash cost guidance of $51.00 per ton to $56.00 per ton, excluding Lone Mountain.

In the Powder River Basin, second quarter 2017 sales volumes declined 15 percent when compared with the first quarter of 2017 due largely to typical shoulder season decline, while the average sales price per ton was essentially flat when compared with the prior-quarter period. Segment cash costs increased $0.49 per ton over the first quarter of 2017, primarily reflecting the impact of lower volume levels in the segment and an unplanned repair expense. Given strong cost control coupled with expected shipment levels in the year's second half, Arch is reducing the top end of its cost guidance for the segment. The company now expects cash costs to be in the range of $10.20 per ton to $10.60 per ton for 2017.

In the Other Thermal segment, Arch recorded a second quarter 2017 cash margin of $11.35 per ton compared with $11.69 per ton in the first quarter. Sales volumes were flat during the period, supported by strong international and domestic demand for West Elk, while average sales price per ton declined slightly due to mix of customer shipments. Cash costs per ton declined 7 percent when compared to the prior quarter, reflecting increased sales volume from the low-cost West Elk mine and strong cost control from the other operations in the segment. Given the ongoing demand for Arch's West Elk product in both domestic and international thermal markets and increased interest in Coal-Mac's higher-quality product, Arch is lowering its full-year cost guidance for the segment. The company now anticipates cash costs to be in the range of $23.00 per ton to $27.00 per ton for 2017.

Key Market Developments

Metallurgical Coal Markets

At the outset of the second quarter, global coking coal prices increased dramatically to nearly $300 per metric ton following the cyclone-driven rail closures in Queensland. However, very few tons were sold at peak levels as buyers headed to the sidelines and coking coal prices retraced back to pre-cyclone levels by mid-June.

 

Since then, the market has found support, with recent global supply disruptions moving near-term pricing up strongly. The Platts East Coast price assessment shows all products up roughly $20 per metric ton on average, with High-vol A marks increasing more than $23 to reach $167 per metric ton, since June 20, 2017.

 

Additionally, imports into China are up strongly year to date and it appears buyers have returned to the market, encouraged in part by the fact that seaborne metallurgical coal is trading at a discount to Chinese domestic production.

 

Moreover, global hot metal production has provided support with demand up 2.5 percent through the first half of 2017, while global steel prices remain in a fairly healthy and sustainable range.

 

Counterbalancing the positive demand trends somewhat, global coking coal supply is increasing in response to the stronger pricing environment, led by the United States and Mozambique. Arch continues to believe that metallurgical prices will need to remain well above historical levels to keep these tons in the market and keep the market balanced.

 

Thermal Coal Markets

Higher temperatures across much of the country in recent weeks should support natural gas prices and advance the continued liquidation of stockpiles. Cooling degree days (CDDs), which are a good indicator of summer temperatures, are more than 2 percent above the five-year average at present.

 

With a reasonably normal summer and relatively stable natural gas prices, coal inventories could fall below 70 days of supply by year-end. While that is still above projected target levels, it's a dramatic improvement from the 108 days of supply with which we started 2016.

 

Moreover, the recent heat has prompted some large U.S. coal consumers - particularly Powder River Basin users - to approach the market to fulfill spot volume needs.

 

Globally, fundamentals for moving U.S. coal into seaborne thermal markets have remained positive. Arch has continued to leverage higher Newcastle and API2 prices to opportunistically move West Elk and other thermal products into seaborne thermal markets.

 

Company Outlook

Based on the company's current expectations regarding the outlook for metallurgical coal markets, Arch has raised its coking coal volume guidance for 2017. Arch now expects to sell between 6.9 million tons and 7.1 million tons of coking coal. At the midpoint of its volume guidance level, Arch is now more than 90-percent committed on coking coal sales for the full year, with more than 20 percent of that committed volume exposed to index-based pricing. At the midpoint of guidance, Arch's thermal sales are 95-percent committed for the full year 2017. 

 

"Looking ahead, Arch is in a uniquely competitive position to leverage its complementary lines of business to capitalize on strong metallurgical markets and dynamic thermal markets," said Eaves. "As we progress through the balance of the year, Arch remains financially sound, operationally strong, strategically positioned and completely committed to creating long-term value for our shareholders." 

 

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