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Arch Coal Inc. (ACI - Analyst Report) reported second-quarter 2013 loss of 29 cents per share, narrower than the Zacks Consensus Estimate of a loss of 32 cents. The loss incurred in the reported quarter was much wider than a loss of 10 cents per share in the prior-year quarter.

The slackness in the global metallurgical (met) coal market primarily affected the company’s bottom line in the second quarter.

On a GAAP basis, the second-quarter loss was 34 cents compared with a loss of $2.05 per share in the year-ago quarter. The variance between GAAP and pro forma loss was due to a 10 cent impact from asset impairment and closure costs, a 1 cent gain related to the amortization of acquired sales contracts and a 4 cent gain from tax adjustments.

Total Revenue

Arch Coal’s second-quarter total revenue of $766.3 million missed the Zacks Consensus Estimate by 17.9% and fell short of the year-ago revenues by 20.6%. The revenue decline was due to a steady drop in the average sales price of coal from the company’s Powder River Basin (PRB) and Appalachian mines.

Operational Update

Arch Coal sold 35 million tons of coal in the reported quarter, up 11.1% year over year due to a 24.3% upswing in sales at the PRB partially offset by lower sales volume from the Appalachia and Western Bituminous operations.

In the quarter under review, total operating cost per ton shrank 17.6% year over year to $21.90 due to successful cost curtailment efforts at the company’s PRB and Appalachia Basins partially offset by an increase in cost at the Western Bituminous region.

Despite the stringent cost control measures operating margin per ton dwindled to 44 cents from $1.87 in the year-ago quarter. The 13.2% year over year plunge in average sale price in Appalachia dragged down Arch Coal’s profit.

The company’s average sales price per ton was $22.34 in the quarter, down 21.4% year over year. Arch Coal’s adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in second-quarter 2013 were $110.5 million, reflecting a substantial year-over-year decline of 38.9%.

Financial Update

Cash and cash equivalents of the company as of Jun 30, 2013, were $644.2 million versus $784.6 million as of Dec 31, 2012.  

Long-term debt as of Jun 30, 2013, fell slightly to $5,078.6 million from $5,085.9 million at year-end 2012.

Operating cash flow in the first six months of 2013 declined 45.3% to $52.0 million from $95.3 million in the first six months of 2012.  As of Jun 30, 2013, the company had available liquidity of $1.2 billion of which $900 million comprised cash and other short-term investments. Arch Coal had no borrowings under its revolving credit facility as of Jun 30.

Guidance

Arch Coal increased its 2013 sales guidance to the range of 137.7–145.3 million tons of coal from the prior 133–144 million tons. This includes 130–137 million tons of thermal coal and 7.7–8.3 million tons of met coal. The current softness in the met coal market compelled the company to idle two mines at the Cumberland River area. This required Arch Coal to decrease its met coal sales guidance from the prior range of 8–9 million tons.

The overall outlook however reflects a gradual recovery in the U.S. thermal coal market. Arch Coal estimates thermal coal usage to increase by 50 million tons from 2012 levels. The company expects U.S. coal exports to remain above 100 million tons in 2013 although the pace of shipments will moderate from the first half.

The company lowered its full-year 2013 capital expenditure guidance by $20.0 million to the range of $280–$310 million.

Other Coal Company Releases

Peabody Energy Corporation (BTU - Analyst Report) reported operating earnings of 33 cents per share in the second quarter, surpassing the Zacks Consensus Estimate of a loss of 5 cents per share.

CONSOL Energy Inc. (CNX - Analyst Report) posted second quarter loss per share of 3 cents, falling significantly behind the Zacks Consensus Estimate of earnings of 18 cents.

Alpha Natural Resources Inc. (ANR - Snapshot Report) is expected to release its second quarter results on Aug 2, 2013.The Zacks Consensus Estimate is currently pegged at a loss of 60 cents.

To sum up

Arch Coal will continue to actively pursue its cost-containment program to streamline its operations. The divestiture of the Canyon Fuel Company, LLC subsidiary to Bowie Resources for $435 million will further aid Arch Coal to meet its cost saving objectives while keeping production at sustainable levels.

In addition, the rising contraction in coal-to-gas switching owing to high gas prices will steadily erode the thermal coal supply glut thereby increasing demand in the domestic market. Moreover, a bullish steel market, driven by Asia and Latin America, will boost Arch Coal’s profits in the coming years.

However, the still weak price fundamentals for thermal coal and strict environmental regulations will act as headwinds. Arch Coal Inc. currently has a short-term Zacks Rank #3 (Hold).
 

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