Coal producer Arch Coal Inc. (ACI) reported net adjusted earnings of 44 cents per share for the second quarter 2011, much lower than the Zacks Consensus Estimate of 62 cents but a penny ahead of the year-ago earnings of 43 cents.
GAAP net earnings during the quarter were 6 cents per share versus 41 cents per share reported in the year-ago quarter. The difference between GAAP and operating earnings was due to a 1 cent impact of amortization of acquired sales contract, 28 cents of acquisition and transition costs, 28 cents of bridge financing cost related to acquisitions and 19 cents of gain from tax adjustments.
Total Revenue
Arch's total revenue of $985.1 million in the second quarter was higher than the Zacks Consensus Estimate of $956 million. Revenue was also above the year-ago figure of $764.3 million, reflecting a growth of 28.9%, mainly on higher sales price per ton.
Operational Update
Arch sold about 36.7 million tons of coal in the reported quarter, down 3.7% year over year. However, a $5.51 per ton increase in the sales price, in the reported quarter, boosted the overall top line of the company. The increase in sales price was mainly driven by higher pricing in every region and a larger percentage of higher-priced tons in the company's overall sales volume mix.
Consolidated operating costs per ton during the quarter increased 6.5% year over year, reflecting the impact of lower Powder River Basin volume levels, a larger volume contribution from the company's Appalachian segment and higher sales-sensitive costs.
Operating margin per ton during the second quarter 2011 was $4.92, up by $2.23 per ton from the year-earlier quarter.
Net interest expenses during the quarter were $41.5 million versus $34.5 million in the year-ago quarter.
Financial Update
Cash and cash equivalents of the company as of June 30, 2011 were $82.34 million versus $56.96 million as of June 30, 2010.
Capital expenditures for the first half of 2011 were $107.7 million, down from $171.9 million reported in the first half of 2010. Arch Coal generated free cash of $206.5 million flow in the first sixth months of 2011 versus $87.4 million in the comparable period last year.
During the quarter the company issued $2.0 billion in senior notes and sold $1.3 billion in common stock to raise necessary funds for acquisition.
Guidance
The company expects 2011 total sales volumes in the range of 160 million to 165 million tons, with metallurgical coal sales comprising 9 million tons. The current guidance incorporates expected volumes from its newly acquired coal assets.
Arch Coal revised its adjusted EBITDA guidance for 2011, which is now expected in the range of $1.08−$1.2 billion, up from $0.93−$1.05 billion earlier.
Depreciation, depletion and amortization expenses of the company are expected in a band of $452 million to $470 million in 2011.
The company now expects adjusted 2011 earnings to range between $1.75 and $2.15 per share, while the GAAP figure, which includes amortization of coal supply agreements, is expected to be in the range of $1.49 to $1.93.
Peer Update
Arch Coal's primary competitor, Peabody Energy Corporation (BTU), announced operating earnings for the second quarter 2011 of $1.11 per share versus 69 cents per share in the year-ago quarter, reflecting a growth of 61.0%. The results of the company also surpassed the Zacks Consensus Estimate of $1.04 per share.
Peabody’s quarterly revenue, at $2.01 billion, increased 15% year over year on the back of robust coal prices across the board and higher Australian volumes.
Our Take
Despite a year-over-year decline in volume of tons sold, Arch Coal was able to surpass our revenue expectation on the strength of higher sales prices per ton. The strong metallurgical coal prices and expected increase in demand in Europe and Asia are boosting the coal industry fundamentals this fiscal year. Arch Coal having a dominant presence in the coal industry only stands to benefit from these positive fundamentals.
During the reported quarter the company successfully closed its merger deal with International Coal Group Inc. This deal ensured Arch's reach in every major U.S. coal supply basin, making it the largest U.S. metallurgical coal producer. We believe the synergies from this strategic acquisition will enhance value for the company’s stakeholders in the coming years.
Based in St. Louis, Missouri, Arch Coal engages in the production and sale of steam and metallurgical coal. The company also ships coal to domestic and international steel manufacturers as well as international power producers. Arch Coal currently retains a Zacks #3 Rank (short-term Hold rating).
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