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Arch Coal, Inc. Reports Fourth Quarter and Full Year 2017 Results

 

 

February 13, 2018 - Arch Coal, Inc. (NYSE: ARCH) today reported net income of $81.3 million, or $3.64 per diluted share, in the fourth quarter of 2017, compared with net income of $33.4 million, or $1.31 per diluted share, in the prior-year period. The company reported adjusted earnings before interest, taxes, depreciation, depletion, amortization, reorganization items and early debt extinguishment charges of $97.6 million in the fourth quarter of 2017, a slight increase versus a year ago. Fourth quarter revenues reached $560.2 million on 23.5 million tons of coal sales. Arch's net tax benefit of $34.8 million results primarily from the benefit associated with the alternative minimum tax (AMT) credits that became refundable under the Tax Cuts and Jobs Act.


For the first full year since its public relisting, Arch reported net income of $238.5 million, or $9.84 per diluted share. Annual revenues topped $2.3 billion and the company reported $417.8 million of adjusted EBITDAR, reflecting Arch's ability to leverage its diverse asset base to capitalize on strong coking and international thermal coal markets.


"We are proud of the financial results achieved in 2017 as well as the positive strides we have taken to reward our shareholders, bolster our financial foundation, streamline our operating portfolio and expand our global customer base," said John W. Eaves, Arch's chief executive officer. "Moreover, we are pleased with our solid fourth quarter performance, which benefitted from improved performance at our metallurgical mines, strong execution at our Other Thermal operations and positive momentum in international coking and thermal coal markets. While severe winter weather at year-end resulted in lower than anticipated metallurgical shipments, we expect to make up those tons in the first half of 2018."


Capital Allocation Update and Financial Position


During the quarter, Arch continued to execute upon its share repurchase program, purchasing 1.1 million shares of common stock, representing 4.2 percent of shares outstanding, at a total cost of $84 million and an average price of $79.73 per share. The fourth quarter purchases include the previously announced stock purchase transaction with Monarch Alternative Capital in early December.


In total, over the course of 2017, Arch purchased approximately 4 million shares of common stock, representing nearly 16 percent of shares outstanding, at a total cost of $302 million. At year-end, the company had up to $198 million remaining for share repurchases under the existing authorization.


In addition, the company paid $7.6 million in cash dividends to shareholders during the fourth quarter of 2017, and $24.4 million during the course of 2017.


"Arch had a strong finish to 2017, completing a number of initiatives to enhance its financial position and increase shareholder value," said John T. Drexler, Arch's chief financial officer. "In addition to returning excess capital to our shareholders, we successfully refinanced and repriced our term loan during the year, trimmed our annual interest expense, and reduced both our collateral requirements and restricted cash balance."


Today, Arch's board of directors announced that it has approved an increase in the company's quarterly dividend to $0.40 per share from $0.35 per share. The board believes this to be a sustainable level through all stages of the dynamic market cycle. The next quarterly cash dividend payment of $0.40 per common share is scheduled to be paid on March 15, 2018 to stockholders of record at the close of business on March 5, 2018.


In the short time period since the capital allocation program was introduced, Arch has provided more than $326 million to shareholders through share buybacks and dividends.


"Arch's ongoing repurchase activity and the announced increase in our quarterly dividend is in alignment with our goal of consistently providing strong shareholder returns while maintaining sufficient liquidity," said Drexler.


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.


The passage of the Tax Cuts and Jobs Act was a significant positive for Arch.The elimination of the corporate AMT will allow Arch to realize all of its remaining AMT credits, resulting in a tax benefit of $35 million in the fourth quarter. Arch filed carryback claims for a portion of those AMT credits in the fourth quarter and a $24.3 million refund was received in January. The remaining $10.7 million of credits will be refunded between 2018 and 2022.Going forward, Arch believes that the reduction in the corporate tax rate, elimination of the AMT, and the company's large net operating loss position should result in a cash tax rate of effectively zero for the foreseeable future.


Arch's cash and short-term investments totaled $429 million at December 31, 2017. At quarter-end, Arch's debt level totaled $333 million, inclusive of the term loan, equipment financing and other debt. The company generated $396 million in cash provided by operating activities for full year 2017, while capital expenditures totaled $59 million, resulting in $337 million of free cash flow.2


Operational Results


"As expected, our Leer and Mountain Laurel mines rebounded well from the geologic challenges experienced in the third quarter of 2017, and each of Arch's operating segments made a significant contribution in the quarter just ended," said Paul A. Lang, Arch's president and chief operating officer. "In particular, we were successful in achieving higher price realizations, good cost containment and expanded margins in our Metallurgical and Other Thermal segments."

 

In the Metallurgical segment, coking coal volumes declined 17 percent when compared with the third quarter due to severe weather in the country's eastern half during December that affected rail service as well as unloading operations at East Coast export facilities. Despite this short-term interruption in the Metallurgical segment, Arch's fourth quarter cash margin per ton expanded 30 percent to $31.32 compared to $24.14 for the prior-quarter period. Average coking coal realizations were lifted by stronger pricing on index-linked tons that priced during the period. Fourth quarter segment cash cost per ton sold declined 8 percent when compared to the third quarter of 2017, driven primarily by normalized mining operations at the company's two longwall mines and good cost control at the other two operations in the segment. The decrease in segment cash cost per ton sold was offset to some degree by the decline in quarterly volumes. Excluding Lone Mountain, which was sold in the third quarter, full year cash cost per ton sold for the segment would have been $59.24.



In the Powder River Basin, fourth quarter 2017 sales volumes declined 2.2 million tons as a result of weak thermal demand driven by still-inflated utility stockpiles and a slow start to winter. Average sales price declined modestly when compared with the third quarter of 2017, reflecting lower pricing on market and index-priced tons and customer shipment mix, while segment cash cost per ton sold increased $0.51 over the same time period. Higher cash cost per ton sold was driven by reduced volumes as well as higher diesel fuel costs.



In the Other Thermal segment, fourth quarter cash margins were $10.55 per ton, an increase of 17 percent versus the third quarter, primarily driven by the region's strong cost performance. Sales volumes were flat during the quarter over the same time period, as they continued to benefit from robust demand in global thermal markets coupled with steady shipments to Viper's baseload customer. Average sales price increased modestly compared to the prior-quarter period, reflecting a favorable mix of customer shipments and attractive pricing on export business. Notably, West Elk and Coal-Mac exported approximately 2.6 million tons into the seaborne thermal market during the year - the highest volume to be shipped for export from those operations since 2013. Arch expects to capitalize on this seaborne opportunity in 2018 as well.


Key Market Developments


Coking Coal Markets


Metallurgical coal continues to trade in a very strong range. High-Vol A prices off the U.S. East Coast, as assessed by Platts, currently stand at $214.50 per metric ton.

 

Moreover, High-Vol A reclaimed its premium over Low-Vol coals in late December, with a $19 per metric ton advantage as currently assessed. The spread between high-vol coals has widened as well, with High-Vol A commanding a $70 per metric ton premium over High-Vol B presently.

 

Overall, Arch believes the global metallurgical market is in healthy balance.As seen repeatedly in recent months, even small supply disruptions or demand bumps continue to translate into significant price moves. Most recently, logistical challenges in Australia, continued supply pressures in China and buoyant steel markets have acted to support metallurgical pricing.

 

Looking ahead, Arch expects metallurgical markets to remain in relative equilibrium throughout 2018.

 

Thermal Coal Markets


International thermal markets remain strong on growing Asian demand, with prompt month Newcastle prices at just under $100 per metric ton - a favorable level for Arch's West Elk operation.

 

In the domestic markets, heating degree days year to date are up more than 15 percent over 2017 levels.

 

Arch believes coal stockpiles declined by an estimated 5 million tons in January - and are down by a total of 65 million tons since the beginning of 2016. However, they are still 20 million to 30 million tons higher than target - at an estimated 130 million tons at the end of January.

 

Powder River Basin prices have moved sideways in recent months, reflecting comfortable stockpile levels and limited buying activity. However, Arch continues to believe that U.S. generators have a significant amount of tonnage to buy for the remainder of 2018, and expects increased activity as we progress through the first half of the year.

 

2018 Outlook


The company is initiating full year sales volume guidance for 2018. Based on current expectations, Arch expects total sales of between 92 million and 99 million tons, a level in line with the company's 2017 sales volumes. Included in this range are projected sales of between 6.4 million and 7.0 million tons of metallurgical coal.


On the metallurgical side, Arch has committed select volumes at strong pricing with its North American customer base. Arch also has a large percentage of its 2018 coking coal either committed and subject to market pricing or still available, which will allow it to capitalize on strong seaborne coking coal market dynamics. At the expected midpoint of its volume guidance level, Arch is nearly 65 percent committed on coking coal sales for the full year, with approximately 60 percent of that committed volume exposed to market-based pricing. Arch expects that approximately 80 percent of its metallurgical production will be sold to international steelmakers.


Arch expects to sell between 86 million and 92 million tons of thermal coal in 2018. At the midpoint of guidance, Arch's thermal sales are approximately 82 percent committed for full year 2018.


Arch currently anticipates that cash cost per ton sold in the Metallurgical and Powder River Basin segments will be similar to 2017 levels. The Other Thermal segment's cash cost per ton sold is expected to be higher, adjusted for anticipated production mix between the mines in the segment.

 

"Looking ahead, given the company's low-cost operational profile and leverage to the upside potential of coal markets, Arch is exceptionally positioned to capitalize on positive fundamentals in international coking and thermal coal markets and the eventual recovery in domestic thermal markets," said Eaves. "We firmly believe Arch's diversified asset base, strategic marketing plan, talented and experienced workforce and strong balance sheet should enable the company to create significant value for our shareholders, earn substantial returns and generate considerable free cash flow in the future." 

 

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