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Arch Coal reports stronger-than-expected Q3 as it focuses on met segment

Highlights

Leer mine acquisition to add 24 million st

More met cutbacks expected

Houston — Despite dropping metallurgical coal prices, Arch Coal had a stronger-than-expected third quarter as it increasingly focused on its met segment, executives said during the producer's third-quarter earnings call Tuesday.

"Coking coal prices pulled back markedly during the quarter in the face of trade-related tensions and concerns over global economic growth as well as slowing steel demand, weakening steel prices and compressed steel margins," CEO John Eaves said during the third-quarter earnings call. "During Q3, the price of High-Vol A coal, our primary product, [retraced] to under $140 per metric ton at September 30 after averaging nearly $200 per metric ton during the year's first half."

Arch sold 2.1 million st in the third quarter from its metallurgical segment, up 9.5% year on year. Sales per ton sold was $98.89/st during the quarter, down from $104.75/st in Q3 2018, and cash cost per ton was $64.89/st, up from $62.54/st.

"Our flagship Leer mine, in particular, turned in an exceptional performance, with cash costs below $45 per ton," Paul Lang, president, said, adding that "while we're pleased with the segment's performance, we also see significant potential to improve in the coming quarters."

In September, Arch entered an agreement to acquire 20 million st of low-cost, high-quality High-vol A coking coal reserves adjacent to its Leer mine for $52.5 million. Expected to close in the fourth quarter, the deal should increase the Leer mine plan by nearly 24 million st.

Also, the producer expects a 20% increase in Leer's average seam thickness in future panels, leading to an improved operation performance in future quarters.

Arch's Mountain Laurel mine, on the other hand, "has been a bear," Lang said, in this last quarter given difficult mining conditions, leaving "costs that were triple digit at the mine in Q3."

By the end of 2019, however, the mine should be transitioned to a continuous miner operation, leading to lower costs, improved coal quality and more consistent operating performance.

MET MARKET EXPECTATIONS

"Several high-cost US coking coal mines have idled in recent weeks in response to the lower price environment, and US exports are down 11% through August with further erosion possible. Australian output is up only modestly and continues to undershoot the level achieved in the peak year of 2016," Eaves said. "In short, supply and demand appear modestly out of balance at present, and corrective measures seem to be underway."

In the met market, as well, "I think you're going to see more cutbacks," CFO John Drexler said during the call. "Prices were $200, and you still had the volume going down. I mean, we're down 11% year to date on exports, and we expect that number to go down further between now and the end of the year."

Arch Senior Vice President Deck Slone said: "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. 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."

THERMAL MARKET

From the Powder River Basin, 22.2 million st were sold, up 3.2% from the year-ago quarter, at a price per ton of $12.02/st, flat from the year-ago quarter.

Cash cost per ton was $9.77/st, up 1 cent from Q3 2018.

"I think first and foremost, what we're competing against in the PRB is natural gas or renewables," Lang said. "And the natural gas, those $2.25 rates, PRB is going to continue to drop in volume. And as you've seen in the past, we'll make whatever adjustments we need to make."

Other thermal coal sold by Arch totaled 2 million st in Q3, down 25% year on year, at a cost per ton of $39.52/st, up from $36.96/st.

While Arch's total revenue was over $619 million in Q3, down 2.2%, net income totaled about $107 million, down 15.4% year on year.

"Arch Coal's strong third quarter reflects the company's focus on metallurgical coal, solid execution and aggressive shareholder returns," Benjamin Nelson, VP-senior credit officer and lead US coal analyst at Moody's, said in an email to S&P Global Platts. "However, with metallurgical coal prices moving down meaningfully over the past few months and a significant open contract position in 2020, we will be very focused on the company's ability to generate free cash flow in a lower pricing environment and plans to fund the Leer South project."

PRODUCTION, COST GUIDANCE

Arch confirmed its coking coal full-year 2019 guidance of 6.7 million st-7.1 million st and a cost guidance of $61/st-$65/st.

The producer does expect price realizations to decline in Q4, given lower average projected index-based pricing.

During Q3, Arch entered agreements to supply 1.5 million st of coke to North American customers in 2020 at a price of about $110/st and 1.6 million st into the seaborne market on an index-based pricing structure.

In the PRB, Arch expects reduced volumes and higher unit costs in Q4.

-- Olivia Kalb, olivia.kalb@spglobal.com

-- Edited by Bill Montgomery, newsdesk@spglobal.com