MarketWatch  Dec 11  Comment 
Shares of Arch Coal Inc. rallied 2.4% toward a record high in morning trade Monday, after the coal producer announced a deal to buy back 500,000 shares from its second-largest shareholder, Monarch Alternative Capital LP. The company said it will...


Arch Coal (NYSE: ACI) is the second largest coal dealer in the U.S. The company is responsible for 8% of the electricity generated in the U.S.[1][2] The company sells coal mainly to power plants, steel mills, and industrial facilities.[3] Arch Coal produces about 16% of the U.S. coal supply at its 11 mining complexes in Wyoming, Utah, Colorado, West Virginia, Kentucky, and Virginia.[2]

Arch estimated that power generation declined roughly 4.0 percent in 2010, which represented the largest decline in power demand on record.[4] The decline in the demand for coal and also the price of coal has had an adverse effect on Arch's sales volumes and profit margin. At the same time, the dominance of coal power plants as the primary source of electricity is being threatened by the increased use of natural gas and nuclear energy, and also renewable sources such as hydroelectric and solar power.

Company Overview

Arch Coal sells coal to electric utilities, factories, and other coal-burning businesses. These customers then burn the coal to fuel their generators and produce electricity. Arch Coal's operations in the Western Bituminous region are located in southern Wyoming, Colorado and Utah and include four underground mining complexes and one surface mining complex. ACI's operations in the Central Appalachia region are located in southern West Virginia, eastern Kentucky and southwestern Virginia and include four mining complexes, including nine underground mines and four surface mines.

The vast majority of ACI's coal was transported by an extensive U.S. rail network and delivered to 175 power plants across the U.S., powering the equivalent of 20 million homes.[1] Arch Coal's mines benefit from economies of scale; Arch coal's surface mines are 215% more productive per hour than the national coal industry average, and its underground mines were 60% more productive than the national average.[3]

Error creating thumbnail
U.S. Electricity Generation by Source[5]

I have been impressed with much of the cotencre design in Risa-3D. I have 2 suggestions. One, compute the shear strength of the column based on equation 11-4 ( which takes into account the axial load on the column. This load can greatly increase the shear strength of the column.Without using the axial load I get tie spacing of 4 for a 30 square column with 2500 kips. I do not mind being a little conservative, but the contractor is going to scream loudly if I require 6 spacing in a non-seismic region. My second suggestion would be to compute both the compression and tension lap splices for the column reinforcing.

Trends and Forces

Arch Coal is investing in clean coal technologies

Error creating thumbnail

By 2015, the U.S. government will require power plants to reduce sulfur-dioxide emissions nearly 60% below 2003 levels.[6] Arch is helping power plants achieve these reductions by mining clean-burning, low sulfur coal for electricity generation. Nearly 82% of Arch's 2.8-billion-ton reserve base is low in sulfur content, with 73% meeting the most stringent requirements of the Clean Air Act without the application of scrubber technology.[6]

Though Arch already mines low-sulfur coal, it has made investments in technology companies focused on making coal combustion cleaner. It has partnered with a coal-conversion company that plans to transform coal into domestic supplies of gasoline, with the potential to capture CO2 emissions during the conversion process for use in enhanced oil recovery.[6] Furthermore, Arch Coal has invested $8 million in clean coal research through the Washington University in St. Louis and the University of Wyoming Clean Coal Technology Center.[6]

Arch Coal must comply with government environmental protection efforts

Arch Coal's mining activities can have an adverse effect on the environment. In March 2011, Arch Coal agreed to pay $4 million for more than 1,000 violations of the Clean Water Act in a settlement with Kentucky, West Virginia, and the Environmental Protection Agency.[7] West Virginia, Kentucky, and the EPA claimed that Arch Coal violated its permits and released excessive amounts of iron, manganese, and other pollutants into streams and rivers at four plants: Cumberland River Coal, Coal Mac, Mingo Logan Coal and Lone Mountain Processing. Arch Coal has since taken measures to prevent an estimated 2 million pounds of pollution from entering watersheds each year and has installed a treatment system to reduce selenium discharges.

Falling coal prices have lowered Arch's profit margin and lower demand for electricity has driven down sales volumes

Coal companies are price competitors. This makes it difficult for companies to maintain high profit margins. When demand for coal is high, as could be caused by colder weather patterns or a rapidly expanding economy, prices rise because of an undersupply to meet the demand.

Arch estimates that power generation declined roughly 4.0 percent in 2010, which represented the largest decline in power demand on record.[4] This expected decline in coal consumption reflects overall weaker power generation trends, stronger nuclear utilization, increased precipitation in hydroelectric power regions, fuel switching to natural gas, weak demand facing industrial customers, reduced need for coking coal from domestic steel producers, and the impact of lower coal exports.[4]

Error creating thumbnail
Coal commodity spot prices[8]


The only way coal companies like Arch Coal can control their profitability is by keeping their costs down. This is also very difficult, however, because the majority of coal inputs are also commodities - steel, natural gas, diesel. As the prices of these products fluctuate, the cost of coal production fluctuates, making the profitability of coal a function of an output cycle and a number of input cycles. Thus, even if coal is in high demand with high prices, rising steel costs can crimp profit margins.

Production Constraints

Production constraints can have a powerful, positive effect on coal price and, thus, Arch Coal's profitability. Limited transportation resources, like port space and rail capacity, can artificially limit the supply of coal. Further constraints, like labor or capital, can limit the amount of coal being produced at a mine, again limiting supply and pushing prices up. While this has the potential to limit coal companies' potential revenues, it also tends to make coal more profitable. Limits on labor, port, and rail capacity in foreign markets have contributed to the profit boom in the American coal industry.

Safety Regulations

Mines are dangerous places to work; perils range from falling debris to accidental explosions to dust-induced respiratory illness. Unions and citizens movements are working for better mining conditions, which means higher production costs; the U.S. location of Arch Coal's mines means that labor cannot be exported to less-regulated parts of the world. The recent Coal Mine Health and Safety Act of 2006 is an example of a government regulation that has the potential to raise costs and lower profitability by taking time and energy away from production.

Mine Divestiture

Recently, the company has been selling off more and more of its holdings, in an attempt to retain high-capacity, low-cost mines and acquire new, more profitable ones. Arch Coal sold the majority of its Appalachian holdings in 2005; in the process, it got rid of many of its liabilities, including future employee health-care and pensions. The shrinking supply of coal in the Appalachian mines has been leading to higher costs of extraction, making the region less and less profitable. Other companies, like Peabody Energy (BTU), got rid of their holdings in the region only recently, giving Arch Coal a head start to gain back its losses. All in all, divesting resources from the region should be a positive move because it would allow Arch Coal to divert resources to more profitable locations like the Powder River Basin.


As a form of energy, coal faces most of its competition from natural gas, a cleaner burning source of power. If natural gas prices fall, the entire coal industry could face a drop in revenue as power consumers turn to the cheaper form of energy.

Arch Coal faces increased competition during times of high coal demand, and decreased competition during times of low demand. Because of the company's size and well-established industry position, there is very little risk of its collapse during a period of low demand. Arch Coal's major competitors include Peabody, Massey Energy Company, CONSOL Energy (CNX), Rio Tinto PLC, and a number of Chinese entrants such as Yanzhou Coal Mining. To compete effectively, Arch Coal must control its costs; controlling prices is very difficult because product pricing is a function of the market.

2008 Coal Industry Production Data Peabody[9] Arch Coal[10] Massey[11] CONSOL[12]
Tons of Coal Sold (millions) 255.5 139.6 41.0 66.2
Total Reserves (millions of tons) 9,200 2,837 2,338 1780.9
Coal sales (millions of dollars) $1,413.9 $2,983.8 $2,559.9 $3,229
Net Profit Margin 15.03% 11.88% 1.88%10.44%


  1. 1.0 1.1 Arch Coal Annual Report 2008
  2. 2.0 2.1 [http://www.archcoal.com/aboutus/ Arch Coal, Inc: About Us}
  3. 3.0 3.1 ACI Annual Report 2009
  4. 4.0 4.1 4.2
  5. Energy Information Administration
  6. 6.0 6.1 6.2 6.3 6.4 Arch Coal: Annual Report 2008, p. 6
  7. Courthouse News: "Arch Coal to Pay $4M in Clean Water Act Case" March 2, 2011
  8. Energy Information Administration: Coal Commodity Spot Prices
  9. BTU 10-k 2009 "Results of Operations"
  10. ACI 10-k 2009 "Results of Operations" p. 52
  11. MEE 10-k 2009 "Results of Operations"
  12. Consol Energy 10-k 2009 "Results of Operations"
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki