Arch Coal quarterly loss beats view, stock up on outlook

Fri Jul 27, 2012 12:15pm EDT

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(Reuters) - Arch Coal Inc (ACI.N) posted a second-quarter loss, hurt by charges to close mines in the face of falling prices, but it still beat Wall Street estimates and its shares rose 12 percent.

The company, which has idled five mines in the Appalachian region to cut production, forecast an improved U.S. market for thermal coal, which is used for power generation. But it cut its sales estimate for steelmaking metallurgical coal.

Arch Coal is considering selling some non-core assets or reserves, Chief Executive John Eaves said on a conference call with analysts on Friday.

"I don't want to set an expectation that a transaction is certain to occur," Eaves added. "We know the inherent value of our assets and reserves and we don't plan to give that value away."

Arch shares were up 19 percent at $6.26 in late morning trading on the New York Stock Exchange. The stock fell to its lowest level in more than a decade on Thursday.

The quarterly loss comes at a time when the U.S. coal industry is going through a tough period, with weak demand from utilities and steelmakers and prices slumping as some power companies switch to cheaper natural gas.

Most coal companies have been forced to cut back production, especially in the high-cost Appalachian region and one, Patriot Coal Corp PCXCQ.PK, recently filed for Chapter 11 bankruptcy protection.

Although it produced and sold less coal in the second quarter, Arch reduced its costs.

This helped to increase overall operating margins, noted Brean Murray Carret & Co analyst Lucas Pipes. "The beat was driven by the company's costs solid cost performance in its Appalachian and PRB (Powder River Basin) segment," Pipes wrote.

CEO Eaves was bullish on the prospects for thermal coal. "Summer has arrived ... bringing heat, power load and increased coal burn," he said in a statement.

"With improving coal demand and ongoing supply rationalization, we could end the year with domestic stockpiles below 175 million tons, the level at which we entered 2012."

Excluding restructuring charges to close mines and other one-time items, the company posted a loss of 10 cents per share in the quarter. Analysts had expected a loss of 18 cents per share, according to Thomson Reuters I/B/E/S.

Following a relatively mild winter, electricity demand dropped and stockpiles of coal at power plants rose.

In addition, some utilities switched from coal to cheaper natural gas to fuel. As a result, thermal coal prices have slumped some 20 percent this year.

Arch lowered its estimate for metallurgical coal sales to 7.5 million tons this year from the 8.0 million to 8.5 million tons it had expected.

"Global coal prices are currently soft as supply growth has outpaced demand through the first half of 2012," Eaves said in the statement

Arch said global steel production declined month-over-month in June, particularly in Europe, while steel plant utilization rates in the United States fell below 75 percent in July from 80 percent in April.

But the company said China and India were on pace to surpass record coal import levels in 2011.

"As global economic growth accelerates, we expect coal markets to rebalance and tighten significantly," said Eaves.

St. Louis-based Arch trimmed its forecast for prices for Powder River basin, Western Bituminous and Appalachian coal, but slightly raised its forecast for Illinois Basin coal.

The second-quarter loss was $435.5 million, or $2.05 per share, compared with a profit of $6.3 million, or 4 cents per share, in the year-earlier quarter.

The company has idled coal-face operations at its Dugout Canyon mine in Utah for the first half of 2012 and reduced the workforce at several operations in eastern Kentucky with about 100 layoffs.

Revenue increased 8 percent to $1.1 billion, beating the average analyst estimate of $998 million, despite a 14 percent decline in sales volume compared with the second quarter of 2011.

The company produced 31.5 million tons of coal in the quarter, down from 35.5 million in the first quarter and 36.7 million in the year-earlier quarter.

(Reporting by Steve James and Matt Daily; Editing by Gerald E. McCormick, Jeffrey Benkoe, Sofina Mirza-Reid and Ted Kerr)

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