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Arch Coal Inc. (ACI - Analyst Report) reported first-quarter 2013 pro forma loss of 34 cents per share, marginally wider than the Zacks Consensus Estimate of a loss of 32 cents. The loss incurred in the reported quarter was also much wider than a loss of 4 cents per share in the prior year.

The lingering effect of weak coal fundamentals from 2012 primarily led to unfavorable results in the first quarter.

On a GAAP basis, first-quarter loss was 33 cents compared with earnings of a penny in the year-ago quarter. The variance between GAAP and pro forma loss was due to a 1 cent gain related to the amortization of acquired sales contracts.

Total Revenue

Arch Coal’s first-quarter total revenue of $825.5 million missed the Zacks Consensus Estimate by 13.2% and fell behind the year-ago revenue by 20.5%. The revenue decline was due to a persistent downside in average sales price.

Operational Update

Arch Coal sold 34.1 million tons of coal in the reported quarter, down 4% year over year due to 2.2% and 24.4% drop in sales at the Powder River Basin and Appalachia, respectively.

In the quarter under review, total operating cost per ton shrank 10.8% year over year to $21.46 due to a decline in operating cost per ton across the company’s Powder River and Appalachia Basins partially offset by increase in cost at the Western Bituminous region.

Costs were curtailed in several operational regions via minimizing overtime and contractor cost, savings from consumables and reduction in other carrying costs.

However, the cost-containment efforts proved futile due to a steeper fall in selling price per ton, which led to declining profit. Operating margin per ton dropped to 20 cents from $1.66 in the year-ago quarter.

The company’s average sales price per ton was $21.66 in the quarter, down 15.8% year over year. Arch Coal’s adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in first-quarter 2013 were $84 million, reflecting a substantial year-over-year drop of 53.3%.

Financial Update

Cash and cash equivalents of the company as of Mar 31, 2013, were $730.1 million versus $784.6 million as of Dec 31, 2012.  

Long-term debt as of Mar 31, 2013, fell slightly to $5,082.2 million from $5,085.9 million at year- end 2012.

Operating cash flow in the first quarter declined 21.2% sequentially to $43.2 million.  As of Mar 31, 2013, the company had available liquidity of $1.3 billion of which $1.0 billion comprised of cash and other short-term investments and $300 million for borrowing.

Guidance

Arch Coal reiterated its 2013 sales guidance in the range of 133–144 million tons of coal. This includes 125–135 million tons of thermal coal and 8–9 million tons of metallurgical coal.

The company however lowered its full-year 2013 capital expenditure guidance to the range of $300–$330 million from the earlier range of $330–$360 million.

Other Coal Company Releases

Peabody Energy Corporation (BTU - Analyst Report) reported an operating loss of 5 cents per share in the first quarter, narrower than the Zacks Consensus Estimate of a pro forma loss of 14 cents per share.

CONSOL Energy Inc. (CNX - Analyst Report) is expected to release its first quarter results on Apr 25, 2013. The Zacks Consensus Estimate for the quarter is 19 cents.

Alpha Natural Resources Inc. (ANR - Snapshot Report) is expected to release its first quarter results before the market open on May 2, 2013. The Zacks Consensus Estimate for the quarter is pegged at a loss of 59 cents.

Our View

Arch Coal’s top and bottom line yet again fell short of our expectations. However, we believe rising natural gas prices would contract the coal-to-gas switching in the U.S. This would boost coal sales going forward. In addition, the summer months would lend significant upside to sales with consumption expected to go up.

A bullish steel market in Asia and Latin America would also drive met coal demand, boosting Arch Coal’s profits. The company has booked 6.5 million tons of met coal in 2013.

However, strict environmental regulations will continue to pose challenges to the company. Arch Coal Inc. currently has a short-term Zacks Rank #3 (Hold).

St. Louis-based Arch Coal Inc. 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.

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