Arch Coal Inc. mines in Kentucky and elsewhere in Central Appalachia were able to sell coal for slightly more than the cash cost of mining it during the first quarter of 2014.
According to figures released Tuesday, Arch Coal’s Appalachian mines, including Cumberland River Coal Company’s operations in Letcher County and Wise County, Va., sold 3.6 million tons of coal during the first three months of 2014 for an average price of $67.70 per ton, or $2.22 more per ton than the actual cash cost of mining it.
However, when total operating costs such as depreciation, depletion and amortization are figured in, Arch’s cost to produce a ton of coal in Appalachia was $80.80. That’s a loss of $13.10 in “operating margin per ton,” up from $10.82 in the fourth quarter of 2013 and $8.74 one year ago.
Arch, based in St. Louis, said its losses widened as weaker prices and demand cut into its margins.
The company said it would shave by about one million tons from its outlook for shipments of metallurgical coal like that mined by Cumberland
River and used in the making of steel. Arch says it lost $124.1 million, or 59 cents per share, in the first three months of the year. That’s up from a loss of $70.5 million, or 33 cents per share, a year ago. Its revenue slipped to $736 million from $737.3 million a year ago.
“As expected, our first quarter results reflect a challenging global metallurgical coal market and the impact of rail performance issues,” said John W. Eaves, Arch’s president and chief executive officer. “At Arch, we are taking proactive steps to manage our controllable costs and capital spending, reduce our cash outflows and preserve our liquidity. Moreover, we are reducing our expected metallurgical coal sales volume by approximately 1 million tons for 2014 in response to soft market conditions and concentrating our metallurgical production in our lowest-cost assets in Appalachia. Based on the smooth start-up of the Leer longwall mine [located in Grafton in northern West Virginia] in the first quarter of 2014, we also are lowering our full year cost-per-ton guidance in Appalachia.”
“At the same time, we are encouraged by the strengthening dynamics in the U.S. thermal market,” added Eaves. “ Positive electric generation and coal demand trends to date, declining U.S. coal generator stockpiles and higher competing fuel prices should provide the catalyst for improvement in our domestic thermal coal operations during 2014.”
As of March 31, Arch had a total liquidity position of $1.4 billion, with more than $1.1 billion of that in cash and short-term investments. The company continues to have no borrowings under its revolving credit facility and has no debt maturities until 2018.
Consistent with the company’s strategy to re-align its asset portfolio, Arch divested non-strategic assets in Appalachia during the first quarter of 2014, including its Hazard thermal mining complex in Kentucky and its ADDCAR equipment subsidiary. Total consideration for these divestitures was $46 million. As a result of these sales, Arch recorded a pre-tax gain of $13.8 million in the first quarter of 2014, which is included in other net operating income. Offsetting this gain in that line, Arch recorded a charge of $12.5 million for the three months ended March 31, associated with minimum port and rail commitments for export tonnage.
Arch also announced in its quarterly report that its subsidiaries earned 12 safety and environmental awards in the three months ended March 31. Most notably, says the company, Arch’s Leer mine attained the 2013 Greenlands Award, West Virginia’s top environmental honor in the U.S. coal industry. This honor marks the tenth time that an Arch subsidiary has earned the award since 2001.
In addition, the Coal- Mac operation completed 2 million employee hours without a lost-time safety incident in March 2014. Furthermore, five of Arch’s operations and facilities attained a Perfect Zero a dual goal of operating without a reportable safety incident or environmental violation for the three months ended March 31.
“We commend our employees for achieving such safety and environmental accomplishments, and for their ongoing commitment to living our core values,” said Paul A. Lang, Arch’s executive vice president and chief operating officer. “We are constantly striving for improvement at all of our operations, with an ultimate goal of a Perfect Zero across our entire operating platform each and every quarter.”
Concerning operational results, Lang said that “during the first quarter of 2014, our Appalachian region, anchored by the Leer mine, delivered its strongest cost performance since 2011, prompting a reduction in our 2014 expected cost per ton for that region. In addition, increased domestic thermal demand has resulted in an improving outlook for the West Elk mine in Colorado, prompting us to reduce our 2014 cost per ton for that region. In the Powder River Basin, we remain focused on achieving further improvement during 2014 as rail congestion eases and customer demand climbs.”
Compared with the fourth quarter of 2013, consolidated cash margin per ton declined in the first quarter of 2014, partly due to lower earned margins in the company’s Bituminous Thermal segment. Consolidated sales price per ton increased slightly over the same time period, but wasoffsetbya2percentincrease in consolidated cash cost per ton.
In the Powder River Basin, first quarter 2014 cash margin increased more than 40 percent to $1.28 per ton versus the fourth quarter of 2013. The improvement wasdrivenbya4percent increase in average sales price per ton, reflecting higher pricing on contracted and market-based tons. Cash cost per ton increased slightly versus the priorquarter period, due to the impact of lower shipment levels resulting from continued rail service issues.
In Appalachia, Arch earned a cash margin of $2.22 per ton in the first quarter of 2014, representing a 4 percent increase compared with the fourth quarter of 2013. Average sales price per ton decreased in the first quarter of 2014 versus the priorquarter period, driven by lower pricing on metallurgical tons. Offsetting this decline, cash cost decreased by $1.93 per ton over the same time period, due to the addition of the Leer longwall and improving geological conditions at Mountain Laurel.
In the Bituminous Thermal segment, Arch earned a cash margin of $6.00 per ton in the first quarter of 2014 compared with $11.52 per ton in the fourth quarter of 2013. Average sales price per ton declined over the same time period, driven by customer contract rolloffs and lower pricing on export tons.
Eaves says that when looking at market trends, Arch is “seeing a strengthening domestic thermal market in 2014, supported by improved power demand, depleting customer coal stockpiles, higher natural gas prices and low natural gas storage levels that will need to be rebuilt.”
U.S. power generation hit record levels during the first two months of 2014, and Arch expects U.S. coal consumption for power generation to increase more than 25 million tons in 2014 versus 2013 levels. Even with modest supply increases, Arch expects strong reductions in utility coal stockpiles throughout the year, due to solid demand and continued higher prices for competing fuels. Based on internal estimates, U.S. utility coal stockpiles could be below 110 million tons by the end of the summer burn season, or nearly 30 percent below the 10-year average.
While the domestic thermal market is trending upward, the seaborne market remains challenged, as oversupply has pressured global prices for metallurgical and thermal coals. However, Arch believes the long-term outlook for the seaborne coal trade remains positive and the opportunities for U.S. coal significant. Global coal trade is projected to exceed 1.5 billion metric tonnes by 2020, with approximately 100 gigawatts of new coal-fueled power projected to come online in 2014 alone. That new coalfueled power could result in more than 300 million metric tonnes of incremental annual coal demand this year.
Arch says the global metallurgical coal market will remain soft in 2014, even as global steel production is projected to grow. However, recent and ongoing closures of some high-cost capacity and an improving demand outlook should lead to a more balanced market over time.
Arch now expects thermal sales volumes for 2014 to be in the range of 124 million to 132 million tons. The company has lowered its metallurgical coal sales guidance, and now expects to ship between 6.3 million and 7.3 million tons for 2014. In addition, Arch has reduced its annual cash cost-per-ton guidance range for both its Appalachian and Bituminous Thermal segments, while maintaining its cost outlook for the Powder River Basin. The company has modestly reduced its capital spending levels to a range of $180 million to $190 million for full year 2014.
“ Going forward, we will continue to focus on managing costs and capital across the organization and look for opportunities to offset the impact of external market challenges,” said Eaves. “With strong liquidity, low-cost assets, superior reserves and access to growing global coal markets, Arch is strategically positioned to capitalize as coal markets recover.”
Arch Coal’s price on the New York Stock Exchange fell 8.45 percent Tuesday, or 42 cents, to $4.55 per share. Arch’s 52-week high stock price has been $5.82 per share, while its low has been $3.47.
— Compiled from staff, AP and PR News reports.