Fallen Arch in final quarter

WHILE the weak market deflated Arch Coal’s net income and revenues in the fourth quarter, the producer has an upbeat outlook for 2010, expecting a “transformative” year for coal.
Fallen Arch in final quarter Fallen Arch in final quarter Fallen Arch in final quarter Fallen Arch in final quarter Fallen Arch in final quarter

Arch Coal's Skyline propoerty.

Donna Schmidt

Arch recorded net income of $US42.2 million, versus the record $354.3 million in 2008 before the economic downturn.

Revenue in the December quarter declined slightly, from $729.9 million to $725.5 million year-on-year, and for the whole year slipped from $2.98 billion to $2.57 billion.

Arch cited charges associated with its $769 million acquisition of Rio Tinto’s Jacobs Ranch complex in Wyoming’s Powder River Basin for the revenue slump. It also pointed to lower sales volumes and decreased prices amid a weaker coal market during most of 2009.

"Arch persevered through the worst power generation market in the last 60 years to maintain profitability in 2009," chief executive officer Steven Leer said.

Despite the difficult environment, he noted, Arch did work towards its long-term growth strategy with an increased footprint in the PRB, its total reserve base jumping 1 billion tons via selective acquisitions, and by establishing the world’s largest coal operation, Black Thunder.

"While much uncertainty remains, our goals for 2010 will be to stay disciplined in cost control and capital spending, maintain financial flexibility and continue to follow a market-based approach to production and sales,” Leer said.

In the fourth quarter Arch inked a coal lease with Great Northern Properties Limited Partnership, securing rights to 731 million tons of resources in the Otter Creek tract of Montana which will be developed into a dragline-operated surface complex.

"The lease of GNP's Otter Creek reserves provides an attractive future growth opportunity for Arch to build a significant position in the northern Powder River Basin coal region," Leer said.

"We believe future development of these Montana coal reserves will further strengthen Arch's ability to competitively serve the northern US power generation market, provide us with an additional supply source to export into the fast-growing Pacific Rim coal market and could eventually support a coal-conversion facility."

While Arch said coal markets did deteriorate in 2009, leading to historically high stockpiles, the final quarter of the year showed signs of stabilization. Among these were higher steel utilization rates globally, tightened seaborne coal markets from increased importing in Asia, lower domestic coal supplies in nearly all regions, and the increase of coal-fueled power plants coming online between 2010 and 2012.

"We believe that 2010 will be a transformative year for the coal industry," Leer said.

"As excess coal stockpiles are worked off at US and European power plants, global coal markets are poised for a meaningful recovery."

For the year, Arch’s production sales volumes are 145-155Mt, including 4-5Mt of projected sales for metallurgical coal.

Based on the commitments signed in the December quarter, the company has 5-8Mt of uncommitted sales volumes in 2010, 70-80Mt in 2011 and 100-110Mt in 2012. In addition, coal committed but not yet priced is at 13Mt for 2010 and roughly 20Mt for both 2011 and 2012.

Capital spending will be $200-220 million this year, with $25 million earmarked for the completion of the West Elk preparation plant, which is anticipated to come online in the third quarter.

"In light of weak economic conditions and dampened coal demand in 2009, Arch reduced its capital spending by 35 per cent from 2008 levels," Arch senior vice-president and chief financial officer John Drexler said.

"In 2010, we expect to build upon this rigorous capital management, with anticipated further reduction in capital spending levels, despite the addition of incremental volume from the former Jacobs Ranch mine."

Looking ahead, Leer said Arch would be looking up after a weak first quarter due to anticipated customer shipment levels.

“Beginning in the second quarter, results should benefit from higher metallurgical coal pricing and volumes, higher pricing on market-priced tons as well as a more favorable mix of customer shipments under existing contracts,” he said.