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Arch Coal beats analysts' expectations in challenging met coal market

Pointing to cost control and strength in volumes, Arch Coal Inc. executives beat analyst expectations for the thermal and metallurgical coal producer as markets for the fuel at home and abroad softened in recent weeks.

The company's metallurgical coal segment performed well despite the weaker market and challenging mining conditions related to the longwall mining machine at the company's Mountain Laurel complex, executives said on an Oct. 22 earnings call. Arch Coal also announced a reserve acquisition, adding several years of life to its flagship Leer mine, and resolved a land dispute in New Mexico worth $39 million while maintaining its accelerated program of returning capital to shareholders.

"Arch turned in another strong operating performance and generated healthy levels of cash despite the recent softening in the coking coal markets," CEO John Eaves said. "Importantly, we maintained great momentum in our core coking coal franchise with strong volumes and excellent cost control and continued to drive ahead with our well-defined strategy for long-term value creation and growth."

The new reserve acquisition will extend the life of the company's Leer mine by approximately six years, Arch Coal President and COO Paul Lang said. The company bought the reserves from Blackhawk Mining LLC for $52.5 million.

"In short, we're investing capital of about $2.50 per ton for incremental reserves at an operation that has captured a cash margin of more than $65 per ton year-to-date," Lang said. "The acquisition will also support a stream of low-risk, world-class coking coal projects that should deliver increasing levels of earning and cash flow well into the future."

Assuming a run rate at current operations similar to last year, to date, the company has entered into agreements that place about 45% of its 2020 coking coal volumes, Lang said. Arch Coal executives said they do expect to see more of a pullback on production volumes from higher-cost competitors if prices remain low or drop any further as supply and demand remain out of balance.

"We wouldn't mind seeing the market stay down for a bit, quite frankly, because it does tend to separate the wheat from the chaff, sort of drives out the higher cost production, perhaps chases away some of these marginal projects that shouldn't be looking at coming into the market," said Deck Slone, senior vice president of strategy and public policy. "But we're not sure that these prices are going to stay down for very long, given how quickly you're seeing the supply response."

Update on capital return programs

Arch Coal bought back another 1.2 million shares of its stock in the quarter, bringing its total buybacks since launching the program to 10 million shares. In total, Eaves said Arch Coal returned $98 million to shareholders in the third quarter, consisting of $91 million in share buybacks and $7 million in dividend payments. Through the first nine months of 2019, it returned more than $255 million to shareholders, 18% more than during the same period of 2018.

"To recap our progress since launching the capital return program in May of 2017, just 10 quarters ago, we have returned nearly $900 million and bought back almost 40% of our initial shares outstanding," Eaves said. "That's a rare achievement for any company regardless of the industry, and we believe it underscores the powerful cash-generating capabilities of our operating platform."

However, the buyback program is now expected to slow down.

"Given lower met pricing, as well as higher capital spending associated with the Leer South build-out and the Leer reserve acquisition, we currently expect a moderation in repurchases in coming quarters, absent a further rebound in coking coal prices," Arch Coal Senior Vice President and CFO John Drexler said. "We will continue to work with the board to determine the appropriate level of ongoing capital return going forward to ensure we are generating long-term sustainable returns for our shareholders."

Arch Coal reported net income of $106.8 million, or $6.34 per share, in the third quarter of 2019, compared with $123.2 million, or $6.10 per share, in the prior-year period.