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Evaluating Arch Coal’s Sharp Fall in Appalachian Costs in 3Q15

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Arch Coal’s Appalachian costs

Arch Coal (ACI) reported operating costs per ton of $63.7 in Appalachia in 3Q15, compared to $79.9 in 3Q14 and $76.5 in 2Q15. The company exhibited stellar cost performance in 3Q15. Increased productivity at the company’s low-cost Leer and Mount Laurel mines in the Appalachia region, idling of high-cost mines in the region, and lower diesel costs helped the company exhibit a 16.7% drop in costs per ton in the segment in 3Q15 over 3Q14.

The company’s cost performance in 3Q15 is even more impressive when we consider the fact that it shipped fewer tons in 3Q15 than had been previously shipping. Selling fewer tons causes fixed costs to get divided between fewer tons, which escalates the fixed cost per ton.

Other coal (KOL) producers including Peabody Energy (BTU), Consol Energy (CNX), and Cloud Peak Energy (CLD), focused on cost saving amid pricing pressures as well during 3Q15.

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Operating loss per ton

But despite its 16.7% decrease in costs per ton in the Appalachia region, Arch Coal’s Appalachia segment reported an operating loss of $1.46 per ton in 3Q15, compared to its operating loss of $10.63 per ton in 3Q14. The loss expanded primarily as pricing fell. However, excluding non-cash costs such as depreciation and amortization, the company saw a more than 300% rise in cash margins per ton.

This should lead us to ask the next pressing question: What about ACI’s Powder River Basin segment? We’ll take a look at that segment in the next two parts of this series.

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