Coal producer Arch Coal Inc. (ACI) reported net adjusted earnings of 8 cents per share for the third quarter 2011, much lower than the Zacks Consensus Estimate of 15 cents and the year-ago earnings of 35 cents.
Poor results in the third quarter primarily reflect lower Powder River Basin shipments versus the year-ago due to the impact of Midwestern flooding on rail service, as well as reduced profitability at the Mountain Laurel operation in Appalachia as a result of geologic challenges.
Total Revenue
Arch's total revenue of $1,198.7 million in the third quarter missed our forecast of $1,223 million. Revenue was, however, above the year-ago figure of $874.7 million, reflecting a growth of 37%, mainly on higher sales price per ton.
Operational Update
Arch sold about 39.9 million tons of coal in the reported quarter, down 8.7% year over year. However, an $8.78 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 metallurgical coal pricing offset partially by the soft thermal coal pricing.
Consolidated operating costs per ton during the quarter increased 25% year over year, reflecting the impact of increased operating costs in Appalachia and a larger percentage of higher-cost Appalachian tons in the company's overall volume mix.
Despite the higher costs and issues faced in Appalachia, the company’s adjusted EBITDA showed an improvement of 5.2% year over year mainly on higher metallurgical coal shipments and better metallurgical coal pricing.
Operating margin per ton during the third quarter 2011 was $3.25, up by 29 cents per ton from the year-earlier quarter.
Net interest expenses during the quarter were $76.9 million versus $36.8 million in the year-ago quarter.
Financial Update
Cash and cash equivalents of the company as of September 30, 2011 were $158.5 million versus $93.6 million as of December 31, 2010.
Capital expenditures for the nine months ended September 30, 2011, were $215.9 million, down from $221.6 million reported in the year-ago comparable period. Arch Coal generated free cash flow of $255.5 million in the nine months ended September 30, 2011 versus $235.1 million in the comparable period last year.
Guidance
The company now expects its 2011 GAAP earnings to come between 69 cents and $1.14 per share, while adjusted earnings per share is projected to be in the $1.00-$1.40 range. GAAP guidance for 2011 includes advisory, financing and legal fees, severance, amortization of acquired coal supply agreements and other costs stemming from the acquisition of International Coal Group (ICG), which was completed in June.
Arch Coal forecasts adjusted EBITDA in the range of $900 − $1,000 million. Depreciation, depletion and amortization expenses are expected in a band of $449 million to $465 million in 2011.
The company projects capital spending, excluding acquisitions and new reserve additions, to range between $390 million and $410 million, roughly $100 million lower than prior forecasted levels.
Peer Update
Arch Coal's primary competitor, Peabody Energy Corporation (BTU), announced operating earnings for the third quarter 2011 of 87 cents per share, missing the Zacks Consensus Estimate of 89 cents. The company’s profits for the quarter also dipped 12% from last year’s earnings of 99 cents, reflecting expenses related to the purchase of Macarthur Coal.
Peabody’s quarterly revenue, at $2.04 billion, increased 9% year over year on the back of higher coal prices across the board and higher U.S. volumes.
Our Take
Arch’s results in the third quarter were severely hit by the Midwestern flooding and the geological challenges in Appalachia. However, improved metallurgical coal shipments and robust met coal pricing had a positive effect on the company’s performance.
Looking ahead, Arch expects to prioritize and maximize the build out of its metallurgical coal franchise, including accelerating Tygart Valley's longwall startup by six months to mid-2013. It also expects to deliver record export coal shipments in 2011, striving to further expand the company's export capabilities to service the growing seaborne coal trade.
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 has a Zacks #5 Rank (short-term ‘Strong Sell’ rating).
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