We maintained our Neutral recommendation on Arch Coal Inc. (ACI - Analyst Report). The premier coal producer currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Arch Coal ended the second quarter 2013 with a wider year-over-year loss owing to the challenging global metallurgical coal market. The reiteration takes into account the impact of the Environmental Protection Agency’s new proposal regarding implementation of carbon-capture technology by coal-fired plants. This will make coal a less attractive option for utility companies thereby affecting premier suppliers like Arch Coal.
Moreover, the company is likely to face increased competition from other coal mining companies in Australia and Indonesia, which enjoy a transportation cost advantage due to their proximity to the importing countries in Asia.
Arch Coal’s continued capital restraint efforts and cost minimization strategies are however expected to be key growth drivers. The company will streamline its operations by focusing its spending on low-cost thermal mines and the profitable metallurgical coal mines of Appalachia.
Arch Coal managed to enter into multiple long-term agreements with customers, some of which will run through 2018 and will contribute to a steady revenue stream. In addition, world steel utilization is projected to increase by 35% in 2020, which will substantially benefit the company’s metallurgical coal sales.
Nonetheless, a downgrade in credit rating to “BB-” by Standard & Poor’s will pose difficulties for Arch Coal in accessing the capital markets and will increase the borrowing cost.
Other Stocks to Consider
Well-positioned Industry players at present are Zacks Ranked #1 (Strong Buy) Alliance Holdings GP, L.P. (AHGP - Snapshot Report), and Zacks Ranked #2 (Buy) Alliance Resource Partners L.P. (ARLP - Snapshot Report) and The AES Corp. (AES - Analyst Report).