Coal-producer Arch Coal Inc. said Friday its fourth-quarter earnings slid but still beat Wall Street's expectations despite a softening U.S. coal market that has Arch now expecting to cut its domestic production this year.
Still, the St. Louis-based company — one of the world's biggest coal producers — insisted its balance sheet was strong, making it well-positioned to perhaps gobble up smaller players distressed under the global recession and tightened credit. Rival Peabody Energy Corp. voiced a similar openness Tuesday to shopping.
"Clearly assets are much more attractively priced than they were 12 months ago, and Arch has historically grown via acquisition by buying assets during periods when valuations were depressed and below their long-term replacement value," Steven Leer, Arch's chairman and chief executive, said during a conference call with analysts.
Arch reported net income of $62.3 million, or 44 cents per share, compared with $81.4 million, or 56 cents per share, a year ago. Analysts surveyed by Thomson Reuters expected, on average, earnings per share of 39 cents and revenue of $713.9 million.
Revenue rose to $729.9 million from $644.4 million.
For all of 2008, Arch earned $354.3 million, or $2.45 per share. That's roughly double the $174.9 million, or $1.21 per share, the company earned in 2007. Analysts on average expected earnings of $2.42 per share.
Citing a pullback in coal-reliant steel production and electrical generation, "we believe that 2009 will be a transitional year for the U.S. coal industry," Leer said. "Supply rationalization coupled with the re-start of global economic activity later in the year and demand from new coal plants coming online should cause markets to rebalance over time."
Given the recession and turmoil in the U.S. financial markets, Leer said it was taking "a cautious view of the current global and domestic economic challenges" by trimming its production outlook and capital spending for 2009.
As rival Peabody did Tuesday in kicking off the coal sector's earnings parade, Arch said it would defer issuing any earnings guidance for the year, with Lear pressing that "it is extremely difficult to forecast 2009 with any precision at this time due to the current state of flux in the economy."
Arch shares were down $1.48, for 8.8 percent, to $15.31 in afternoon trading.
In October, while announcing that its third-quarter earnings more than tripled over the same period a year earlier, Arch cited the near-term softening of coal demand in lowering its earnings outlook for the year to $2.30 to $2.55, down from its forecast of $2.50 to $2.85 per share in July.
Just days later, Arch said it was cutting back operations at its Black Thunder mine in Wyoming's Powder River Basin, noting that pricing wasn't sufficient.
Arch, whose coal fuels about 6 percent of all U.S. electrical generation, said it now expects its sales volumes for this year to be 120 million to 127 million tons.
"We are confident that a patient, market-driven approach to sales contracting and the commitment to leave tons in the ground are the right long-term decisions for the company and our shareholders," Leer said. Daniel Scott, an analyst with Dahlman Rose & Co., said that while he found Arch's announced production cuts encouraging, "the company's open position leaves some 2009 risk amid unclear market conditions."
The company expects to spend between $215 million and $245 million for maintenance capital — Scott said that figure last year was $497 million — with an additional $40 million for previously committed projects that will be completed over this year's first three months. Arch also expects to spend $155 million to $185 million for land and reserve additions this year.
"Arch continues to forecast a very attractive long-term outlook for global coal markets," Leer said. "At the same time, we believe it is prudent to align capital spending with current soft market conditions and economic uncertainty."
The company sold 34.2 million tons of coal in the fourth quarter, down slightly from 34.8 million tons the previous three months. Each ton Arch sold fetched on average $19.76, down from $20.38 during the third quarter. The company's operating margin per ton averaged $3.52, compared with an average of $3.73 from July through August.
Arch, which extracts the bulk of its coal from its western U.S. operations, said sales of its coal mined from Wyoming's Powder River Basin also slipped, to 25.8 million tons in last year's last three months from 26.2 million tons in the third quarter. Each ton sold on average for $11.44, 23 cents a ton better than the previous three months.
The company said it sold 3.7 million tons of coal from its central Appalachia region for an average of $69.80 per ton, compared with 3.5 million tons that on average fetched $78.95 a ton from July through August.
Arch said it has between 14 million and 18 million tons of coal unpriced for this year, half of which is already committed. Based on the company's current lower production levels, Arch has 55 million to 65 million tons unpriced in 2010 and 95 million to 105 million tons in 2011.
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On the Net:
Arch Coal Inc., http://www.archcoal.com
