Arch Coal Reports Surprise Profits

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Arch Coal Inc. (NYSE: ACI) reported third quarter 2012 results before markets opened this morning. The coal mining company posted adjusted diluted earnings per share (EPS) of $0.20 on revenues of $1.09 billion. In the same period a year ago, the company reported adjusted EPS of $0.03 on revenues of $1.2 billion. Third-quarter results compare to the Thomson Reuters consensus estimates for a net loss of $0.16 per share and $1.01 billion in revenues.

The company’s CEO noted:

Arch’s third quarter performance reflects improvement over the second quarter due to our cost control efforts and modestly better domestic thermal markets driven by favorable summer weather and higher competing fuel prices. During the third quarter, we saw margins in both of our western regions expand due to increased shipment levels, higher price realizations and strong cost control. … Looking ahead, we believe global coal markets are in the process of correcting — with the domestic thermal market building some momentum while metallurgical markets are bottoming out.

Arch Coal’s rather stunning results are the result of strict cost control. The company has shut down three mines and expects to lower its forecast capex spending by $60 to $80 million for the full fiscal year.

The company believes coal consumption will grow again in 2013 as natural gas costs rise above $4 per million BTUs. That is roughly equivalent to $32 a ton for bituminous coal. Arch reports commitments to sell its western bituminous coal at $35.75 a ton in the fourth quarter at a cash cost of $23.00 to $25.50 per ton. Powder River Basin coal is committed at $13.63 a ton after a cash cost of $11.00 to $11.30 a ton.

U.S. coal exports also are expected to reach a record 125 million tons in 2012, and Arch Coal expects that quantity to grow “meaningfully” as coal export terminals are added, primarily on the West Coast. The company sticks by its forecast for 2 billion metric tons of seaborne coal exports by 2020.

Arch Coal’s shares are up 10.3% in premarket trading, at $8.07, in a 52-week range of $5.16 to $20.37. The consensus target price for the shares was around $9.00 before today’s report.

Paul Ausick

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