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Arch Coal outlines status ahead of expected emergence from bankruptcy

Days before it is expected to emerge from bankruptcyprotection, Arch CoalInc. laid out what it sees as an ideal financial and energylandscape for the St. Louis-based producer to reclaim some, if not all, of itsshare of the coal marketplace.

In an investor presentation filed on Sept. 30, Arch drewattention to improvements and adjustments in the domestic and global coalmarkets, allowing the company to emerge as an active metallurgical and thermalcoal producer.     

"Arch's operations — on both the metallurgical andthermal sides — are sustainable in any market environment, and recentrationalization has created a healthier supply equation," Arch wrote.

Arch filed for bankruptcy protection in January and received approval for itsreorganization plan on Sept. 13 despite a series of objections from creditorsand entities close to the company. The company filed for an extension to fileits reorganization plan for final court approval, but is now to confirm the plan on Oct. 6.

Arch used the presentation to lay out what it sees asimprovements in the coal marketplace that will provide an ideal setting for thecompany to emerge and recover some market share it has lost in recent years.Most notably, Arch called attention to a sharp in metallurgical coal pricesdue to factors at home and abroad.

"Supply rationalization, demand stabilization, risingChinese imports, and a stronger Australian dollar have contributed to animproving metallurgical prices environment," the company wrote, noting a120% rise in metallurgical coal prices since February.

Noting the role of U.S. supply and the difficulty ofreopening many mines now idled or shut, Arch said the efforts "helpedrebalance the global met market" and with it, Arch's standing in themarket.

"With significant reserves and a strong pipeline ofgrowth and efficiency projects, our met platform is well-positioned forsuccess," the company wrote, predicting 7 million to 7.5 million tons ofmet output in 2017.

The company cited its "flagship" Leer mine in WestVirginia as a clear avenue for benefiting from the rise in prices, as well asthe significant potential of the neighboring reserves, which Arch ownsoutright, freeing it from the obligation of royalties. If developed, thecompany noted, the reserves could "support decades of mining."

According to the U.S. Mine Safety and Health Administration,the Leer mine produced about 1.8 million tons in the first two quarters of thisyear after producing about 3.4 million tons in all of 2015.

Arch also noted potential demand improvement in Europe,which it said still looks to U.S. metallurgical coal as a "corecomponent" of local coke blends.

In addition to its metallurgical coal assets, Arch pointedto the thermal coal potential of its mines located in the Powder River Basin.The company predicted it will be able to better compete with low-cost naturalgas in the coming year, with an expectation that it will be able to"recapture market share" with gas prices holding at an average ofabout $3/MMBtu.

From the company's perspective, "coal has the potentialto recapture some but not all of its lost market share," though Archwarned that it is "unlikely to claw back market share lost to renewables —and coal plant retirements will limit some future upside."

Arch allowed that high stockpiles will likely continue to"pressure domestic markets," but expected that supply to decline byabout 48 million tons through the end of the year, with further declines intoat least the first half of 2017.

Beyond what it sees as an ideal market setting foremergence, Arch pointed to its own financial standing as key to the process,including cost cutting measures, noting reduced operational costs and aright-sized balance sheet, allowing for a "very sustainable capitalstructure."

According to the presentation, Arch expects to emerge fromreorganization with over $300 million of cash on its balance sheet.  

In mid-September, Arch announced it would issue 25 million shares of new commonstock and 50 million shares of preferred stock.