We maintain our Neutral outlook on Arch Coal Inc. (ACI) due to the ongoing regulatory challenges, reserve degradation and soft steam market conditions in Central Appalachia. These are some of the factors that can pull down the company’s prospects of achieving production growth going forward.
Balancing the risks, the positive catalysts are low-cost operations, which provide the company a competitive edge over smaller players; expansion in the Powder River Basin; opening of a port in the west coast; and even the Japan nuclear disaster, post earthquake and tsunami, that has reinvigorated a demand for coal.
However, dependence on a small group of consumers for higher sales, failure to renew contracts or find other buyers for long-term contracts, which accounted for 77% of coal sales in 2010, will hinder production and profitability of the company.
Looking Ahead at 2011
Arch Coal is well positioned to capitalize on the ongoing recovery in the U.S. coal markets but its first quarter 2011 results will be impacted by the idling of the longwall at Mountain Laurel, as announced on January 11, 2011.
For 2011, Arch expects its total sales volume to range between 155 million and 160 million tons. The guidance includes expected metallurgical coal sales of around 7 million tons.
Arch said its adjusted EBITDA in 2011 will be in the range of $910−$1,030 million. Depreciation, depletion and amortization guidance is at $378−$388 million. Capital expenditure at Arch Coal is expected to reach the $370−$410 million range.
Arch Coal expects its 2011 earnings to range between $2.00 and $2.50 per share. On a GAAP basis, the company’s EPS guidance, including amortization of coal supply agreements, is between $1.93 and $2.42.
Our Take
Arch Coal currently retains a Zacks #3 Rank (short-term Hold rating). We believe that the coal operators are looking forward to book high earnings in 2011 given the soaring coal prices. We will nevertheless continue to maintain a neutral stance on Arch Coal given the threats of substitution from alternate energy sources, specifically natural gas, among other factors.
Based in St. Louis, Missouri, Arch Coal engages in the production and sale of steam and metallurgical coal. The company also ships coal to domestic and international steel manufacturers as well as international power producers. One of the major competitors of the company is Peabody Energy Corp. (BTU).
ARCH COAL INC (ACI): Free Stock Analysis Report
PEABODY ENERGY (BTU): Free Stock Analysis Report
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