Arch Coal, Inc. Reports Third Quarter 2017 Results

"The significant progress made under our share repurchase authorization and the recent decision to increase the company's authorization level further underscores our confidence in our business strategy, financial performance and positive long-term outlook for future success," said John T. Drexler, Arch's chief financial officer. "Given our current and anticipated cash position, we firmly believe this is an effective and prudent use of capital and an important benefit to our shareholders."

In addition, the company paid $8.2 million in cash dividends to shareholders during the third quarter of 2017. The next quarterly cash dividend payment of $0.35 per common share was approved by the board of directors, and is scheduled to be paid on December 15, 2017 to stockholders of record at the close of business on November 30, 2017.

Notably, since the commencement of the capital allocation program in early May 2017, Arch has returned nearly $235 million to shareholders through share repurchases and dividends.

Future dividend declarations and share repurchases will be subject to ongoing board review and authorization and will be based on a number of factors, including business and market conditions, Arch's future financial performance and other capital priorities.

In the quarter, Arch also concluded other strategic initiatives to strengthen further its financial position and decrease the company's cost of capital. The company reduced its restricted cash balance by nearly $42 million by lowering collateral requirements and by fully utilizing its inventory credit facility. At quarter-end, Arch had no restricted cash on its balance sheet. Additionally, as previously indicated, the company successfully reduced the interest rate on its senior secured term loan, which is expected to generate annual cash interest savings of more than $2 million.  

Arch's cash and short-term investments totaled $453 million at September 30, 2017. At quarter-end, Arch's debt level totaled $328 million, inclusive of the term loan, equipment financing and other debt.

Arch's Operational Results

"As indicated, we encountered operating challenges in our Metallurgical segment during the third quarter," said Paul A. Lang, Arch's president and chief operating officer. "We experienced tough geologic conditions at both the Mountain Laurel and Leer mining complexes, which contributed to lower-than-expected volumes and higher-than-expected costs. While challenges such as these are expected from time-to-time in our industry, it's unusual to confront issues at two mines simultaneously. Fortunately, strong performances from the other operations in the segment and from both of our thermal segments offset those operating issues to a large degree, and further highlight the importance and strength of Arch's balanced operating portfolio and complementary lines of business. Looking ahead, we believe the challenges experienced in the Metallurgical segment were confined to the third quarter."

Despite difficult mining conditions and rail service issues in the Metallurgical segment, Arch recorded cash margins of $24.14 for the third quarter of 2017 compared to $29.64 for the prior-quarter period. Average coking coal realizations continued to be supported by index-linked tons that priced during the period, but were partially offset by annual fixed-priced tons contracted prior to the start of 2017 and sequential decreases in the Platts East Coast assessments. Third quarter segment cash costs increased 6 percent when compared to the second quarter of 2017, driven primarily by difficult startup conditions in the transition to the Cedar Grove seam at the Mountain Laurel complex and the presence of an acute roll in the coal seam at the Leer mine. Excluding Lone Mountain, segment cash costs for the third quarter would have been $62.04 per ton and cash margins would have been $29.01 per ton.

Due to the production challenges experienced during the third quarter and lower-than-expected coking coal volumes for the year, Arch is raising its annual cash cost guidance range for the segment. The company now anticipates cash costs to be between $56 per ton and $60 per ton for 2017, excluding the Lone Mountain complex. Even with this increase, Arch believes its average coking coal cost structure is near the low-end of the U.S. metallurgical cost curve, and thus maintains its highly-competitive cost position both domestically and internationally.

In the Powder River Basin, third quarter 2017 cash margin per ton increased nearly 30 percent versus the second quarter, driven by lower cost per ton in the segment. Sales volumes increased 20 percent when compared with the prior-quarter period, reflecting typical seasonal demand trends, while the average sales price per ton declined marginally. Segment cash cost decreased $0.55 per ton during the period versus the second quarter of 2017, benefiting from the effect of higher volume levels and strong cost control across the segment's two mining complexes. The company still expects annual cash cost for the segment to be between $10.20 per ton and $10.60 per ton.  

In the Other Thermal segment, Arch earned a cash margin of $9.03 per ton in the third quarter compared with $11.35 per ton in the second quarter. Sales volumes were flat during the period, sustained by strong international demand for West Elk and Coal-Mac products and stable domestic demand for all three operations in the segment. Average sales price per ton during the quarter increased by 5 percent due to a favorable mix of customer shipments and strong pricing on export sales. Cash cost per ton increased by nearly $4 when compared to the prior quarter, reflecting increased sales volume from the segment's higher-cost Coal-Mac mine and a longwall move at the West Elk operation. Due to Arch's ability to leverage its high-quality thermal products and participate more meaningfully in the still-strong export thermal market, the company is again lowering its full-year cost guidance for the segment. The company now anticipates cash costs to be in the range of $22.50 per ton to $26.50 per ton for 2017.

Key Market Developments

Metallurgical Coal Markets 

• In metallurgical coal markets, both demand and pricing for seaborne coking coal remain healthy, even with the ongoing recovery of Australian exports following Cyclone Debbie and modest supply growth elsewhere. 
• Supporting these sound market fundamentals, global steel and hot metal production continue to expand, with global hot metal demand up 2.3 percent through September and steel prices well above last year's levels in all key regions. 
• Of particular importance to Arch, European metallurgical imports are up solidly year-to-date, and U.S. blast furnace utilization has rebounded in recent months. Platts currently assesses U.S. East Coast prices (FOB the vessel) at $167 per metric ton for Low-Vol coal, $149 per metric ton for High-Vol A coal, and $127 per metric ton for High-Vol B coal. 
• Looking ahead, Arch believes the outlook for global metallurgical markets is attractive given buoyant steel markets, strong Chinese manufacturing activity, an improving economic outlook in other key countries, and the high cost structure of much of the recently added coking coal supply. 
• Arch continues to believe that over the long term, global metallurgical markets will find support in the $130 to $150 per metric ton range, which the company believes is a breakeven level for 10 percent or more of global coking coal production capacity.

Thermal Coal Markets

• International thermal markets continue to be robust, buoyed by operational and labor challenges in key producing regions, Chinese thermal coal production constraints, and strong Chinese economic growth. 
• At present, the prompt-month price for Newcastle coal stands at $99.40 per metric ton, which provides for an attractive netback at the company's West Elk mine in Colorado. Similarly, strong API-2 prices into northern Europe allow high-quality thermal coal from Arch's Coal-Mac operation in West Virginia to participate more significantly in the Atlantic Basin export market. 
• As for domestic thermal markets, mild summer weather relative to 2016 and competitive natural gas prices resulted in lackluster coal consumption during the peak demand season. 
• For the summer as a whole, cooling degree days were down 13 percent versus 2016, while natural gas prices tracked closely to the same period last year. In total, Arch estimates that coal burn for June through August was down an aggregate 16 million tons in 2017 versus 2016, and down another 5 million tons in September. 
• Despite that fact, the stockpile liquidation that has been under way since the beginning of 2016 has continued, albeit at a slower pace than previously anticipated. Arch still expects utility stockpiles to fall below 75 days of supply by year-end 2017, and to reach average target levels of 55 to 60 days in mid-2018.

Company Outlook

Based on the company's current expectations regarding production levels at its coking coal operations, Arch has lowered its coking coal sales volume guidance for the year. Arch now expects to sell between 6.6 million tons and 6.8 million tons of coking coal in 2017. At the midpoint of its volume guidance level, Arch is now more than 98 percent committed on coking coal sales for the full year, with 10 percent of that committed volume exposed to index-based pricing. Furthermore, given strong demand fundamentals for U.S. thermal coal globally, Arch has raised its thermal coal sales guidance to reflect increased shipments from the company's Other Thermal segment. Arch now expects to sell between 90 million tons and 96 million tons of thermal coal in 2017. At the midpoint of guidance, Arch's thermal sales are 99 percent committed for full year 2017.

"While we faced a number of challenges during the quarter, we believe those issues are now behind us and we are pleased with our financial performance, the commitment and hard work of our employees and our ability to continue to create value for our shareholders while maintaining a strong and flexible balance sheet," said Eaves. "With our solid cash flows, nimble marketing strategy, durable operating portfolio and efficient method to returning capital to shareholders, Arch is poised for a strong finish to 2017." 

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