Coal news and updates

Arch Coal Can Overcome a Challenging Coal Market

Arch Coal's (ACI) significant drop in the cash costs is helping the company to offset the decline in sales price. Its cash costs have declined $7.00 per ton at Appalachia and by a significant margin at its Powder River Basin. It expects the costs at its Powder River Basin to remain between $10.50 and $11.00 per ton this year. Meanwhile it expects the average cash costs at its Appalachia segment to come in the range of

This is slightly down from its earlier guidance of $57.75 to $61.75 per ton. It sees strong operational performance from these regions particularly at the Leer mine integrated with ongoing cost containment efforts. These improvements in cash costs should enhance its bottom line performance in fiscal 2015. It expects its overall cash costs across its mines to decline approximately 13% this year.

Challenges to consider

The company has lowered its sales volume guidance for the year. Arch Coal expects selling its thermal coal in the range of 120 to 130 million tons. This is down from its previous guidance of around 124 to 136 million tons of thermal coal. With respect to its met coal, the company plans to sell approximately 6.0 to 6.8 million tons of coal, down from its previous guidance of 6.3 to 7.0 million tons of coal.

This lowered guidance reflects the continued weakness of demand for both thermal and met coal. It sees softness in the coal market, which is not expected to improve throughout 2015. The sluggish Chinese imports and continued slowdown in the natural gas prices are leading to this softness in the coal market.

However, the company has committed about 75% of this sales volume at certain prices and about 50,000 tones at a better price in fiscal 2015. In fact, Arch has approximately 1.3 million tons committed for 2016, out of which 700,000 tones are priced at $82.69 per tons. These contracted volumes will assist the company to mitigate slowdown in the coal prices in the short-run.

Moreover, the company is seeing demand for its coking coal even with the softer coal prices across the region. However, the company has the lowest costs of production with diversified operations across the region that will help the company to gain from market opportunities such as making progress on the open sales volume.

Furthermore, the company has cut-down its capital expenditure by $5.0 million to $147.5 million in fiscal 2015. This disciplined capital spending coupled with optimizing its asset base will assist the company to withstand its performance during this tough coal price and demand environment.

Conclusion

Arch Coal remains a good growth stock in the long-run, upon enhancement in the demand and prices of coal. The on-going asset optimization and low costs will yield tremendous returns to investors in the future. Also, the short term gains are impressive enough. The analysts expect its earnings to grow about 17% by the end of next year. Its balance sheet carries total cash of $939.4 million and has total debt of $5.15 billion. It has operating cash flow of $2.42 million and levered free cash flow of $13.59 million.

source: http://www.gurufocus.com