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Arch Coal reports first quarter 2015 results

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World Coal,

Arch Coal, Inc. has reported a net loss of US$113 million, or US$0.53 per diluted share, in the first quarter of 2015 compared with a net loss of US$124 million, or US$0.59 per diluted share, in the first quarter of 2014. Revenues totalled US$677 million for the three months ended 31 March, 2015 and adjusted earnings before interest, taxes, depreciation, depletion and amortisation was US$82 million, a threefold increase as compared to the prior-year quarter.

"Our first quarter 2015 results reflect another strong operating performance with improved adjusted EBITDA generation over the prior-year period," said John W. Eaves, Arch's president and chief executive officer. "We continue to take proactive steps to reinforce our operational and financial flexibility. These actions are positioning us to manoeuvre through both near-term and long-term market challenges by optimising our low-cost asset base, being market responsive, controlling costs and managing liquidity."

Financial Position

As of 31 March, 2015, Arch had available liquidity of US$1.1 billion, including cash and short-term investments of US$939 million and undrawn borrowings on its credit facilities. "We are focused on managing our available liquidity through these difficult conditions," said John T. Drexler, Arch's senior vice president and chief financial officer. "As part of an ongoing review of our costs, we again reduced our capital and administrative spending during the three months ended 31 March, 2015, enabling us to lower spending expectations for full year 2015."

Core Values

Arch made continued progress toward the company's ultimate goal of a Perfect Zero - a dual goal of operating without a reportable safety incident or environmental violation - with five operations achieving this high operating standard in the first quarter of 2015. The company also reported an improved total incident rate for the three months ended 31 March 2015 over the previous quarter and advanced its environmental compliance record.

In addition, Arch subsidiaries were honoured with several state awards during the first quarter for outstanding safety and environmental practices. In February, the West Elk mine was recognised as the safest underground coal mine in Colorado for the sixth consecutive year - a record unmatched by any other large underground coal mine in Colorado.

"We are off to another year of strong safety and environmental performance," said Paul A. Lang, Arch's executive vice president and chief operating officer. "We commend our employees for their many achievements and are proud of their unwavering dedication to our core values."

Operational Results

"Despite lower shipment levels in the first quarter of 2015 when compared to the previous quarter, we increased cash margins by more than 20% in our Appalachian and Powder River Basin segments," said Lang. "Driven by a strong operating performance, our Appalachian region reported its lowest cost performance in four years, allowing us to lower our annual cost guidance for the region."

On a consolidated basis, Arch earned US$3.75 per t in cash margin in the first quarter of 2015 compared with US$3.36 per t in the fourth quarter of 2014, reflecting higher realisations earned in the company's Powder River Basin segment and a strong cost performance in its Appalachian segment. Consolidated sales price per t decreased slightly over the same time period, but was more than offset by a 6% decline in consolidated cash cost per t, reflecting lower cash costs in the Appalachian segment.

In the Powder River Basin, first quarter 2015 cash margin per t increased 23% to US$2.52 per t versus the fourth quarter of 2014. The improvement was driven by a 5% increase in average sales price, reflecting higher pricing on contracted t and a larger percentage of higher-quality t in the company's regional volume mix. Cash cost per t increased slightly in the quarter just ended, driven primarily by higher sales sensitive costs, the impact of lower shipment levels and planned repair and maintenance costs.

In Appalachia, Arch earned a cash margin of US$12.82 per t in the first quarter of 2015 compared to US$9.90 per t in the fourth quarter of 2014. Average sales price per t declined 6% over the same time period, reflecting softer pricing on metallurgical and thermal t and a lower percentage of metallurgical t in the regional sales mix. The US$6.96 per t decrease in cash cost in the quarter just ended more than offset the drop in the average sales price and the impact of lower sales volumes. The 12% cash cost decline reflects the strong operational performance in the region, especially at the Leer mine, and ongoing cost containment efforts.

In the Bituminous Thermal region, first quarter 2015 cash margin decreased to US$8.42 per t versus US$9.80 per t in the fourth quarter of 2014, reflecting the impact of a 30% decrease in sales volumes. Average sales price per t increased 7% versus the prior quarter, reflecting higher pricing on contracted t and fewer export shipments. Cash cost per t increased 17% over the same time period due to the impact of lower volume levels at the West Elk mine.

Market Trends

The global coal trade remains under significant pressure, as prevailing seaborne thermal and metallurgical prices have further softened and supply continues to outpace demand growth in the international thermal and metallurgical markets. Global steel production has declined 1% since the start of the year, marked by weakness in Europe and Asia, and steel capacity factors in the United States fell below 69% in April from 77% at the end of 2014.

Given recent market trends, Arch believes industry-wide coal exports from the United States will decline below 90 million t in 2015 compared with 2014 export levels of nearly 100 million t, with metallurgical exports accounting for most of the reduction. We expect seaborne coal markets to rebalance in time as demand grows, new global supply slows, and previously announced supply rationalisations take effect.

Arch now expects U.S. coal consumption for power generation to decline by 80 million t in 2015 as compared to 2014, due to the surplus of natural gas and the impact of new environmental regulations that took effect in April. As a result of these factors, utility stockpiles increased by an estimated 10 million t during the first quarter and are expected to build further over the course of the year.

Domestic coal supply reductions are counterbalancing demand declines to some extent. Mine Safety and Health Administration data suggests that total domestic production decreased by 13 million t in the first quarter of 2015 versus the fourth quarter of 2014. Arch expects coal supply reductions to continue and accelerate as the year progresses.

Company Outlook

Arch now expects thermal sales volumes for 2015 to be in the range of 120 million to 130 million t. The company has lowered its metallurgical coal sales guidance, and now expects to ship between 6.0 million and 6.8 million t for 2015. Using this revised volume guidance, Arch is more than 95% committed on thermal sales and 75% committed on metallurgical sales for the full year.

Arch has also reduced its annual cash cost-per-t guidance range for its Appalachian segment, while maintaining its cost outlook for the Powder River Basin. The company has raised the 2015 cash cost-per-t guidance range for the company's Bituminous Thermal region to reflect the impact of lower production levels.

"We started the year with a solid sales foundation, and we are building on that position by proactively adjusting our sales expectations and managing our exposure by layering in sales as appropriate to run our mines efficiently," said Eaves. "Looking ahead, we believe our diversified, low-cost asset portfolio and our continued focus on controlling the factors we can will enable us to effectively manage the business through market headwinds."

Adapted from press release by Joseph Green

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