Arch Coal posts 1Q loss on acquisition cost, weak demand for coal used to generate electricity

Arch Coal posts 1Q loss, boosts outlook for year

ST. LOUIS — Arch Coal Inc. said Monday it lost $1.8 million in the first quarter, reflecting charges tied to its recent purchase of the Jacobs Ranch coal mine in Wyoming and soft demand for coal used by U.S. power plants.

But the St. Louis company, which fuels about 8 percent of all U.S. electrical generation, raised its earnings outlook for 2010, saying demand is improving for high-margin metallurgical coal used in making steel. Arch looks to increasingly mine that type of the black ore while it waits for the market for thermal coal — the bulk of Arch’s business — to regain its footing.

Arch’s adjusted earnings and its revenue for the first quarter fell well short Wall Street expectations, and shares of the company rose 7 cents, or less than 1 percent, to close at $26.07.

Arch said it lost a penny a share in the quarter ended March 31 versus a profit of $30.6 million, or 21 cents a share, a year ago. Excluding a non-cash charge related to coal-supply agreements acquired in the Jacobs Ranch deal, it earned 3 cents a share in the first quarter.

Analysts surveyed by Thomson Reuters expected earnings of 8 cents a share excluding one-time items.

Revenue rose 4.5 percent to $711.9 million from $681 million a year ago and short of the $725 million analysts expected.

Arch offered a rosier outlook for 2010, saying prospects of a strengthening market for steel-making coal should help boost its adjusted earnings to $1 to $1.40 per share, excluding non-cash charges. That’s up from its January forecast of 50 cents to $1 per share.

That also tops analysts’ forecasts for annual earnings of 90 cents a share.

Steven Leer, Arch’s chairman and chief executive, told analysts in a conference call that he expected this month’s blast that killed 29 miners at Massey Energy’s Upper Big Branch mine in West Virginia could spawn tighter regulation that ultimately lower coal production.

“We have to assume that the regulatory environment from the safety perspective is going to be very very rigorous on inspections,” he said. “It will be very difficult for the industry to raise their (production) numbers moving forward.”

Jefferies & Co. analyst Michael Dudas, in a research note to clients, wrote that better days may be ahead for Arch and the rest of the sector, noting that “we believe supply cuts, capital expenditure discipline, metallurgical coal pricing momentum and an eventual improvement in utility demand will improve coal industry fundamentals and support a share recovery.”

Steven Leer, Arch’s chairman and chief executive, suggested that much of the improved earnings could come in the second half of this year as U.S. power plants continue winnowing down their coal stockpiles, stoking demand for coal.

“We believe that the long-term outlook for U.S. coal remains bright, and that Arch is well positioned to capitalize on expected growth in global and domestic coal consumption in 2010 and beyond,” Leer said. “Our raised earnings guidance this year reflects our confidence in improving coal market fundamentals and in our ability to generate increasing cash flow for the company’s stakeholders.”

Given the improving outlook for metallurgical coal used in steelmaking, Arch expects to more than triple its planned metallurgical coal sales in 2010 versus last year, said John Eaves, the company’s president and chief operating officer. The company has planned to double its output of metallurgical coal, which Arch sees as having greater growth potential because of voracious demand from Asia.

Arch also boosted the lower end of its production outlook for the year, expecting 2010 sales volumes from company-controlled operations to be 147 million — up 2 million tons from its January forecast — to 155 million tons. That’s despite Arch’s expectations that production in its Central Appalachia operations might be trimmed, given what it called “continued regulatory challenges, reserve degradation and soft steam market conditions” in that region.