We reaffirm our Neutral recommendation on Arch Coal Inc. (ACI). The company posted mixed numbers for the third quarter 2012, as the top line beat the Zacks Consensus Estimate while the bottom line fell short of it.
The U.S. coal market is expected to be under pressure from the continued switching to natural gas; however, the seasonal spike in demand for electricity could improve the company’s operations. Arch Coal’s high-quality Leer Mine prospect is expected to be a major contributor going forward.
The company’s strategy to shift its capital spending to core operations will secure investment options for projects with potential high returns as well as for modernization initiatives. Conversely, Arch Coal’s operations will be impacted by stringent regulations from the Environmental Protection Agency ("EPA") that could potentially result in idling of certain coal plants. The pressure of increasing compliance costs could also lower margins.
The company plans to strengthen its foothold in the Asia-Pacific markets and has entered into several deals on PRB coal with Korea’s power generating companies. Although the met coal market is expected to experience slow growth, we believe these opportunities will keep the growth momentum for Arch Coal.
Nevertheless, unplanned outages or equipment failures and adverse weather conditions like Hurricane Sandy and heavy snows could hamper operations and transportation thereby affecting the company’s financials.
For 2012, Arch Coal expects to sell 129-135 million tons of thermal coal and 7.5 million tons of metallurgical coal. The company’s capital outlay will likely be in the range of $410.0-$430.0 million.
The Zacks Consensus Estimates for the fourth quarter and full year 2012 currently stand at a loss of 12 cents and 31 cents per share, respectively.
The company’s closest peer, Peabody Energy Corporation (BTU) is also facing the brunt of the tough market conditions. Reflecting the broad fundamentals, both these companies hold a short-term Zacks #3 Rank.
The company is a pure coal play and engages in the production and sale of steam and metallurgical coal from surface and underground mines located in the United States.
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