Wider-than-Expected Loss at Arch Coal - Analyst Blog

Arch Coal Inc. ACI reported first-quarter 2014 adjusted loss of 60 cents per share, much wider than the Zacks Consensus Estimate of a loss of 42 cents. In the year-ago quarter, the company posted a loss of 34 cents per share.

The deeper loss was due to soft metallurgical market conditions and rail performance issues.

On a GAAP basis, the quarterly loss was 59 cents per share versus a loss of 33 cents per share in the prior-year quarter. The variance between GAAP and adjusted loss was due to a loss of 2 cents related to amortization of acquired sales contracts and a gain of 1 cent related to tax adjustments.

Total Revenue

Arch Coal's first-quarter total revenues of $736 million edged out the Zacks Consensus Estimate by 0.7% while declining marginally from $737.4 million in the year-ago quarter. Lower average sales price per ton led to the slight year-over-year decline.

Operational Update

In the quarter under review, Arch Coal's sales volume declined 1.6% year over year to 31.4 million tons. This can be attributed to decreased sales contribution from Powder River Basin ("PRB"), partially offset by an increase in sales at the Appalachian and Bituminous Thermal operations.

The company's total operating cost per ton rose 4.2% year over year due to a 6% upswing in operating costs at the Powder River Basin.

In first-quarter 2014, total operating expenses increased 2.6% year over year to $809.1 million, primarily due higher cost of sales.

Arch Coal's adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $27.6 million, reflecting a sharp year-over-year decline of 67%.

Financial Update

Cash and cash equivalents, as of Mar 31, 2014, were $865.8 million versus $911.1 million as of Dec 31, 2013.

Long-term debt, as of Mar 31, 2014, fell to $5,113 million from $5,118.0 million as of Dec 31, 2013.

Operating cash flow at the end of first quarter 2014 was ($40.3) million compared with $43.3 million in the prior-year quarter.

At the end of the first quarter, capital expenditure was $14.5 million, lower than $54.5 million in the year-ago period.
 
Guidance

Taking into account the downturn in metallurgical coal demand, Arch Coal reduced its sales guidance to the range of 6.3−7.3 million tons for 2014 from the previous range of 7.5−8.5 million tons.

On the other hand, the company expects thermal sales in the band 124−132 million tons in 2014. Arch Coal narrowed its 2014 capital expenditure to the range $180 million to $190 million from the previous range of $180 million to $200 million.

Peer Comparison

Natural Resource Partners LP NRP is expected to release its first quarter earnings results on May 7, 2014. The Zacks Consensus Estimate for the first quarter is set at 28 cents.

Alliance Resource Partners, L.P. ARLP is slated to release its first-quarter earnings results on Apr 28, 2014. The Zacks Consensus Estimate for the first quarter is set at $1.74.

CONSOL Energy Inc. CNX is scheduled to release its first quarter earnings results on Apr 29, 2014. The Zacks Consensus Estimate for the first quarter is set at 26 cents per share.

Our Take

Arch Coal's earnings in the first quarter 2014 were affected by slack metallurgical coal demand and a steady decline in average sales price.

However, Arch Coal's cost-management efforts are appreciable, as the start-up of the longwall mine has decreased costs substantially at the Appalachian operations. This is expected to be a strong sales driver in the near term. Currently, Arch Coal carries a Zacks Rank #3 (Hold).