Final financials up, outlook down for Arch

WHILE both net income and revenues rose for Arch Coal in the final quarter, the producer had a gloomy outlook for the new fiscal year amid weak thermal coal demand and plans to cut production.
Final financials up, outlook down for Arch Final financials up, outlook down for Arch Final financials up, outlook down for Arch Final financials up, outlook down for Arch Final financials up, outlook down for Arch

Courtesy Arch Coal

Donna Schmidt

For the period ended December 31, the Missouri-based company reported net income of $US70.9 million, compared with net income of $47.8 million in the previous year. Revenues jumped 47% year-on-year to $1.2 billion.

For the full year, Arch, which acquired fellow miner International Coal Group in June, recorded an adjusted net income of $205.2 million. It set a new sales revenue record of $4.3 billion, 35% higher than 2010, despite lower overall sales volume.

“Arch delivered solid quarterly financial results despite weakening coal market conditions as the fourth quarter progressed,” chairman and chief executive officer Steven Leer said.

“In particular, our Powder River Basin operations rebounded from flood-related disruptions earlier this year. Also, higher realized prices and solid cost control across our diverse operating platform helped to expand our per-ton operating margins versus a year ago.”

He spoke to the safety and productivity the entire Arch portfolio achieved throughout the year even in the face of geological challenges, some weather disruptions, weakening markets as the year began to close and, of course, the largest acquisition in the company’s history.

“Clearly, our strong portfolio of metallurgical and thermal mines drove our success last year – and will continue to do so in 2012 and beyond,” Leer said.

However, 2012’s momentum will be tempered by softer near-term market conditions, leading Arch to reduce its planned production volumes to meet demand.

“These actions preserve our reserve base and increase our flexibility to respond as global and domestic energy markets evolve,” he said.

“At the same time, we will continue to maintain the development timetable for our metallurgical coal growth projects while generating positive free cash flow.”

Arch president and chief operating officer John Eaves said Arch’s focus in the weak market will remain on controlling costs, eliminating discretionary capital spending portfolio-wide and delivering further supply rationalization.

“We’ve previously announced that the longwall at our Dugout Canyon mine in Utah would be idled in the first half of 2012, and we've since reduced the workforce at our operations in eastern Kentucky,” he said.

“These actions, along with additional streamlining efforts, should result in volume reductions of more than 5 million tons for Arch in 2012.”

In its market outlook, the producer said it estimated domestic coal consumption for power generation could decline by 50 million tons or more from 2011 levels due to mild weather. Given that anticipated drop, it wants to set the stage across its operations for the next market upswing.

“Internal estimates suggest that a significant portion of central Appalachia's estimated 125 million tons of thermal production is uneconomic at current index price levels,” Eaves noted, exemplifying the eastern coalfields.

“These are the types of markets where Arch's low-cost mining portfolio really stands out as a competitive advantage.”

Arch’s capital budget for 2012 ranged between $450 million and $490 million, including growth projects, maintenance capital and existing reserve commitments.

About half of that spending will be earmarked for metallurgical coal, including its new and highly-anticipated Tygart Valley longwall mine, which is scheduled to start up in mid-2013.

It will also be doing advanced planning for additional metallurgical coal mines in West Virginia.

“In 2012, Arch is reducing its planned capital expenditures by targeting a lower level of spend for some of our thermal assets,” senior vice president and chief financial officer John Drexler said.

“But we will continue to aggressively develop our low-cost, high-quality metallurgical reserves, and still generate free cash flow to further de-lever our balance sheet.”

Leer said Arch is very proud of the achievements it made in 2012 and wants to approach 2012 with a cautious view on the thermal side of things. The company said it has a solid base of sales commitments and a focused strategy on creating shareholder value.

“We expect to profitably manage through the current downturn, while never losing sight of managing the business for the long term,” he added.

“That is why we are actively pursuing the build out of our metallurgical coal assets in this period of market weakness – a move that we believe will position the company to excel during the next market rebound.”

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