QUOTE AND NEWS
SeekingAlpha  Nov 20  Comment 
TheStreet.com  Nov 19  Comment 
NEW YORK (TheStreet) -- Shares of Arch Coal  fell 5.58% to $2.37 in early afternoon trading Wednesday as thermal coal prices further declined amid a supply glut and reduced demand. In the European market, cargoes for delivery in January to...
TheStreet.com  Nov 17  Comment 
NEW YORK (TheStreet) -- Fund managers are looking to finish strong in 2014 as well as set themselves up for a run in 2015 and beyond. Andrew Ver Planck, portfolio manager for the MainStay International Opportunities Fund, said one of his picks...
SeekingAlpha  Nov 11  Comment 
TheStreet.com  Nov 6  Comment 
NEW YORK (TheStreet) -- Shares of Arch Coal Inc. are higher by 5.53% to $2.48 in early afternoon trading on Thursday, as coal stocks get a boost from Tuesday's election results. With Republicans victorious in the mid-term elections, it's...
newratings.com  Oct 28  Comment 
WASHINGTON (dpa-AFX) - Arch Coal Inc (ACI) said Tuesday its third-quarter loss narrowed, helped by lower expenses that offset a decline in revenue, but fell short of Wall Street estimates. Sales surpassed expectations due to increase in...
newratings.com  Oct 28  Comment 




 


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]

 U.S. Electricity Generation by Source
U.S. Electricity Generation by Source[5]

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Trends and Forces

Arch Coal is investing in clean coal technologies

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]

 Coal commodity spot prices
Coal commodity spot prices[8]

Inputs

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.

Competition

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%



References

  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"
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