Cost cutting bodes well for Arch

A QUARTER dominated by cost reductions put Arch Coal’s shareholders out in front with US$9.3 million income available.
Cost cutting bodes well for Arch Cost cutting bodes well for Arch Cost cutting bodes well for Arch Cost cutting bodes well for Arch Cost cutting bodes well for Arch

Arch CEO Steven Leer. Courtesy Arch Coal Annual Report 2002.

Angie Tomlinson

The US$.18 per share pocketed by shareholders in the third quarter ended September 30, compared favourably to an income of US$1.6 million, or US$.03 per share in the third quarter of 2002.

"During the quarter, Arch's mining operations managed costs well despite reduced sales volumes stemming from a relatively mild summer, normally scheduled mine vacation shutdowns and three longwall moves," said Arch CEO Steven Leer.

"Meanwhile, U.S. coal markets began a long-awaited rally, with coal prices moving up markedly and contract activity heating up as well," he said.

Adjusted EBITDA totalled US$144.4 million for the first nine months of 2003, compared to US$171.1 million in the same period of 2002. Third quarter coal sales volumes were down from 28.7 million tons in 2002 to 25.3 million tons this year.

During the quarter, Arch's eastern operations recorded all-in costs of approximately $31.40 per ton, maintaining the improvements achieved in the second quarter despite an 11% decline in sales volumes. Arch's western operations effectively held the line on costs as well, after a more than 4% reduction in costs in the second quarter.

"Arch's mining operations already rank number one in productivity among major producers in both the Powder River Basin and Central Appalachia for the most recent four quarters for which data is available. However, we expect to enhance our competitive position still further through additional cost reductions in coming quarters," Leer said.

Arch remained positive on its outlook, based on current improving price trends, spurred on by increased coal consumption at U.S. power plants, declining utility stockpile levels, and the continuing rationalization in eastern coal supply.

While the long-term outlook for increased U.S. coal production was positive, output from eastern coalfields has declined, as producers struggle with degraded reserve bases, high costs and a host of other pressures. Last year, U.S. coal production declined by an estimated 3.0%, driven principally by reduced eastern output. In 2003, that trend has continued, with total U.S. coal production down an estimated 2.2% year to date.

Positive market movements will benefit Arch which still has approximately 25% of its expected 2004 production and 45% of its 2005 production open to market-based pricing.

"We are currently in the midst of negotiations with several large coal-burning utilities concerning tonnage for delivery in 2004 and beyond," Leer said. "However, we feel no sense of urgency about committing the remainder of our tonnage, and we would be very comfortable entering 2004 with a significant open position."

Looking ahead, Arch sees itself well positioned to capitalize on this improving market environment.

The company predicted earnings of between US$.05 and US$.15 per share in the fourth quarter of 2003, excluding charges related to the termination of hedge accounting and future mark-to-market adjustments.

The pending Triton acquisition should further strengthen Arch's competitive position, Leer said. "We look forward to integrating the Triton assets into our existing operations."

It was reported in June Arch was to purchase Triton for US$364 million. Triton is the nation's seventh largest coal producer and the operator of two mines in Wyoming's Powder River Basin.

The Triton acquisition is in the midst of the regulatory review process.

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