Arch Coal (ACI, Financial) has struggled badly this year and lost a lot of value in the stock market. But, investors should not get discouraged by the company's steep stock price drop in 2015 as it is gradually making improvements.
Improving gradually
Last quarter, Arch Coal declared a net loss of $113 million, or $0.53 per diluted share, as against a net loss of $124 million, or $0.59 per diluted share, during the same period last year. Total revenue for the first quarter of 2015 was $677 million, with adjusted EBITDA of $82 million, an expansion of three times over the same period last year. The successful attempts of Arch to lower its capital expenditures and maintain enough liquidity on the balance sheet helped the company improve its financial metrics last quarter.
On a combined basis, Arch achieved $3.75 per ton in cash margin during the first quarter of 2015, as compared to $3.36 per ton during the fourth quarter of 2014. This reflects a robust cost performance in its Appalachian segment and greater realizations gained in the company’s Powder River Basin segment. Combined sales price per ton declined somewhat during the same time period, but was largely balanced by a 6 percent fall in combined cash cost per ton, depicting reduced cash costs in the Appalachian area.
Improvements recorded across segments
For the Powder River Basin, first-quarter cash margin per ton jumped 23 percent to $2.52 per ton when compared to the fourth quarter of 2014. The growth was primarily driven by a 5 percent expansion in the average sales price, depicting elevated pricing on contracted tons and greater percentage of improved-quality tons in regional volume mix of the company. Cash cost per ton improved somewhat during the latest quarter, mainly on the back of elevated known repair and maintenance costs, the impact of reduced shipment levels, and sales sensitive costs.
The continued cost-cutting efforts of Arch for the quarter, while enhancing the quality of production in tons, are expected to further solidify its balance sheet by adding improved cash flows from cost savings and better pricing achieved for its superior-quality of produce.
In Appalachia, Arch recorded a cash margin of $12.82 per ton during the first quarter of 2015 as against $9.90 per ton during the fourth quarter of 2014. Average sales price per ton fell 6 percent in the same time period, depicting weaker pricing on thermal and metallurgical tons and a reduced percentage of metallurgical tons in the regional sales mix. The 12 percent reduction in cash costs signifies robust operational performance in the area, particularly at the Leer mine, and the continuing cost control initiatives.
For Bituminous Thermal County, first-quarter 2015 cash margin declined to $8.42 per ton as compared to $9.80 per ton during the fourth quarter of 2014, signifying the effect of a 30 percent fall in sales volumes. Average sales price per ton grew 7 percent as compared to the previous quarter, depicting smaller export shipments and elevated pricing on contracted tons. The reduction in sales volumes for the Bituminous Thermal and Appalachia regions is bound to hurt the company’s margins owing to the reduction in ore demand, but higher pricing will act as a mitigating factor.
On track to meet sales estimates
Arch currently estimates thermal sales volumes for fiscal year 2015 to be in the 120 million to 130 million tons range. The company has reduced its metallurgical coal sales outlook, and currently estimates to ship approximately 6.0 million to 6.8 million tons during 2015. Therefore, Arch seems to be nearly 75% committed on metallurgical sales and over 95% committed on thermal sales for the complete year.
Arch is believed to be making excellent progress in meeting the global environmental regulations and was awarded with many awards in the first quarter for superior environmental and safety procedures. In February, the West Elk mine was identified as the safest underground coal mine in Colorado for the sixth successive year and becoming the only major underground coal mine in Colorado.
The operations of Arch being recognized for matching tough environmental standards highlight its technologically advanced drilling methods. Also, its impressive cash margins despite weak shipment levels in the first quarter of 2015 depict the continued focus of the miner on delivering strong shareholder returns.
The bottom line
Hence, Arch Coal could be a good turnaround candidate to invest in as it is rapidly decreasing its costs and seeing better pricing in certain areas.
