ICG takeover cuts into Arch's 2Q bottom line

ARCH Coal, new owner of rival miner International Coal Group, says acquisition costs paired with lower production have sliced profits in the second quarter, causing it to revise its full-year earnings outlook.
ICG takeover cuts into Arch's 2Q bottom line ICG takeover cuts into Arch's 2Q bottom line ICG takeover cuts into Arch's 2Q bottom line ICG takeover cuts into Arch's 2Q bottom line ICG takeover cuts into Arch's 2Q bottom line

Arch Coal's West Elk mine in Colorado.

Donna Schmidt

For the quarter ended June 30, Missouri-based Arch recorded net income of $US11.1 million, compared with $66.2 million in the same period last year.

Offsetting the profit drop was a jump in revenues, which increased almost 30% year-on-year to a record $985 million from $764.3 million.

Arch pointed to a higher per-ton sales price across all of its operating regions for the rise despite decreased sold tonnage, down from 38.1 million tons in 2010’s second quarter to 36.7Mt in the period just ended.

"The second quarter was a momentous one for Arch Coal – we announced, completed and made considerable progress in integrating the largest acquisition in our company's history," chairman and chief executive officer Steven Leer said.

"With this acquisition, we have expanded and strengthened Arch's value proposition – by creating a world-class global metallurgical and thermal coal franchise poised for growth – while maintaining our sharp focus on mine safety and environmental stewardship."

He highlighted the fact that the record revenue and EBITDA were both achieved in the midst of the ICG acquisition, which closed June 15.

"In particular, per-ton margins expanded meaningfully in our Appalachian and Western Bituminous regions, both of which benefited from higher sales prices, increased volumes and lower operating costs," he said.

The ICG deal has made Arch the second-largest US producer and one of the top ten worldwide for metallurgical coal. Arch says it now also has a powerful platform for growth going forward in both the metallurgical and thermal markets internationally.

"We expect the addition of ICG to create tremendous value for shareholders, and we have now turned our attention to unlocking the full potential of this highly strategic acquisition," Leer said.

“Based upon the milestones achieved during the first six weeks of integration, Arch has increased its annual synergy estimate to between $100 million and $120 million, starting in 2012.”

The integration of ICG with the Arch infrastructure as so far been “smooth and swift” and since closure is now materially complete from an operations and administration perspective.

Arch’s focus now, he said, was progressing with the promised synergies while looking at new ways to grow domestically and globally.

Looking ahead, the producer adjusted its earnings guidance after examining expectations for the metallurgical and thermal coal markets and the contributions it expects to see from its newly acquired assets, but it is also taking into consideration the acquisition-related financing commitments it has made as well as a lower volume projection from the Powder River Basin stemming from ongoing Midwest flooding.

"We expect Arch's shipments in the Powder River Basin to be impacted into the third quarter – with up to 4.5 million tons affected for the full year – due to flooding and rail disruptions," Leer said.

"Despite that fact, our forecast points to a strong second half, as global markets remain strong and domestic markets appear poised to tighten further."

The producer’s whole-year sales volume forecast, which includes ICG volumes post-takeover, also takes into account the flooding issues that has left it with lower-than-expected PRB shipments.

It now forecasts a range for all of 2011 between 160 million and 165 million tons. Its tonnage headed for the met coal market, including coking and pulverized coal injection uses, is expected to be approximately 9Mt whole-year assuming ICG’s contributions for the second half of the year.

It also expects earnings between $284 million to $369 million, and adjusted earnings between $334.6 million and $410.8 million.

Referring to a now “enhanced Arch”, Leer said the company was focused on a three-pronged approach to integration and operations management: safety, stewardship and shareholder value.

"We believe Arch's expanded size, superior metallurgical and thermal coal asset base, low-cost operations and highly productive workforce will enable us to deliver substantial value over the long term."

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