Arch Coal’s bituminous thermal segment outperforms expectations

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Revenues

In all, the bituminous thermal segment of Arch Coal (ACI) generated revenues of around $70.0 million in 3Q 2014 compared to $74.3 in 3Q 2013 and $62.7 in 2Q 2014.

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Cost performance

Management called the bituminous thermal segment “the real star” in the conference call for its 3Q 2014 earnings. The segment has done well on the cost front during the year. The 3Q 2014 cash costs were down to $19.48 per ton from $20.63 per ton.

While the performance may not look spectacular on its face, you should note that the fixed costs per ton in 3Q 2014 were higher due to lower shipments. Costs were also down from 2Q 2014’s $19.83. The cost performance has prompted management to lower its cost guidance for the segment by $1 per ton for 2014 to $20.5–$21.5 per ton.

Margins improve

Due to higher selling prices and lower cash costs, the company’s cash margins per ton from the segment expanded to $12.33 per ton in 3Q 2014 compared to $10.34 in 3Q 2013 and $11.51 per ton in 2Q 2014. Even after adjusting for non-cash operating expenditure, margins remained high at $7.65 per ton in 3Q 2014 compared to $5.46 in 3Q 2013 and $6.83 in 2Q 2014.

The increase in margins at such a difficult time is positive news for the company. If prices keep rising, other coal producers (KOL) in the region, including Peabody Energy (BTU), Alliance Resource Partners (ARLP), and Hallador Energy (HNRG), could also benefit.

The catch

But the increase in pricing doesn’t look sustainable. The company contracted 0.8 million tons of coal for 2014 delivery at $29.2 per ton—lower than the price per ton for the quarter. Even the 1 million tons in 2015 deliveries contracted during the quarter were priced lower, at $29.4 per ton compared to 3Q 2014’s realized pricing. With cost-cutting opportunities fading, margins may drop in the near term if prices don’t pick up.

In the next part of this series, we’ll take a look at Arch Coal’s aggregate performance.

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