Arch Coal, Inc. (ACI, Financial) reported a net loss of $97 million, or $0.46 per diluted share, in the second quarter of 2014, compared with a $72 million net loss, or $0.34 per diluted share, in the second quarter of 2013. Revenues totaled $714 million for the three months ended June 30, 2014, and adjusted earnings before interest, taxes, depreciation, depletion and amortization from continuing operations was $65 million.
Highlights Of The Quarter:
- Arch's second quarter cash margin per ton expands 71% versus first quarter
- Strong second quarter cost control drives full year 2014 cost guidance reduction
- Arch enhances metallurgical platform to lower costs and improve quality
Management Comments:
"During the second quarter of 2014, increased shipments, higher pricing and strong cost control drove margin expansion in each of our operating regions compared with the first quarter," said John W. Eaves, Arch's president and chief executive officer. "Our successful cost control efforts to date β underscored by strong operating performances at Leer in Appalachia and West Elk in Colorado β have allowed us to reduce our cost-per-ton expectations for those segments in 2014."
For the first half of 2014, Arch generated adjusted EBITDA from continuing operations of $93 million compared with $149 million recorded in the first half of 2013. Total revenues declined slightly to $1.4 billion during the first six months of 2014, largely due to lower metallurgical coal revenues versus the prior-year period.
"Recently, we've announced the idling of our Cumberland River complex in response to weak global metallurgical coal prices," said Eaves. "Although idling higher-cost coking coal capacity lowers our metallurgical coal volume expectations for 2014, it also shifts our mine portfolio toward higher-margin metallurgical coal operations and enhances our competitive cost position in that region."
Financial Results:
As of June 30, 2014, Arch had a total liquidity position of roughly $1.25 billion, with nearly $1 billion of that liquidity in the form of cash and short-term investments. The company had no borrowings under its revolving credit facility at June 30, 2014, and has no long-term debt maturities due until mid-2018.
"Through this cyclical downturn, we have been focused on controlling our costs and capital spending, and we have further reduced our capital outlay and administrative spending expectations for full year 2014," said John T. Drexler, Arch's senior vice president and chief financial officer. "We remain confident that these ongoing initiatives β along with an expected strong operational performance in the second half β will help us maintain our solid financial footing going forward, and strategically position Arch to capitalize on a coal market recovery."
Operational Results:
Second quarter 2014 consolidated cash margin per ton expanded 71 percent versus the first quarter, reflecting both higher prices and lower costs per ton in each operating segment. The improvement in consolidated sales price per ton was largely driven by higher-priced domestic thermal coal sales, slightly offset by lower pricing obtained on metallurgical coal shipments. Consolidated cash cost per ton declined 5 percent in the second quarter of 2014 versus the prior quarter period, due to successful cost-containment efforts and the effect of higher shipment levels in the Powder River Basin.
Second quarter 2014 cash margin per ton increased 33 percent in the Powder River Basin, when compared to the first quarter. Average sales price per ton increased modestly over the same time period, while cash cost per ton declined 3 percent, benefitting from the effect of increased shipments and strong cost control. In Appalachia, Arch earned a cash margin of $7.00 per ton in the second quarter of 2014 versus $2.22 per ton in the first quarter. Average sales price per ton increased 2 percent over the same time period, reflecting higher prices on thermal and industrial coal sales as well as a larger percentage of metallurgical coal in the company's regional volume mix. Cash cost per ton decreased 5 percent versus the first quarter, driven by a shift in production toward the company's lower-cost mines in the region and the Leer mine's successful ongoing ramp up to full production.
In the Bituminous Thermal segment, Arch's cash margin nearly doubled versus the first quarter to $11.51 per ton in the second quarter of 2014. Average sales price per ton increased 9 percent over the same time period, reflecting increased domestic demand and lower export volumes. Arch recorded a cash cost of $19.83 per ton in the second quarter of 2014, a 12 percent decline versus the first quarter, driven by strong operating performances at the mines in the segment.
Other Factors:
Arch believes the current coal market downturn is unsustainable over the long term. While global metallurgical coal prices are expected to remain soft throughout 2014, global steel production, a driver of metallurgical coal demand, has increased by 2.5 percent year-to-date and appears poised for continued expansion. Announced closures of higher-cost metallurgical coal supply have accelerated as 2014 has progressed, and many capital growth projects have been delayed or cancelled as current prevailing prices do not justify incremental investment. Arch expects all of these factors to bring better balance to global metallurgical markets over time.
Adding to near-term pressures, prevailing soft seaborne thermal and metallurgical prices are likely to limit U.S. coal exports this year. Arch expects industry-wide coal exports from the United States to decline below 100 million tons for 2014 compared with 2013 export levels of 117 million tons. With prevailing mild summer temperatures to date, Arch now expects domestic coal consumption to increase by approximately 20 million tons in 2014 compared to last year. Even with the mild summer weather, however, coal stockpiles at power generators are likely to shrink β and could end the year at around 50 days of supply. Customer coal inventories in some regions, such as the Powder River Basin, could decline to below-normal levels. Arch now expects thermal sales volumes for 2014 to be in the range of 124 million to 130 million tons. The company has lowered its metallurgical coal sales guidance, and now expects to ship between 6.3 million and 6.9 million tons for 2014.
