Arch Coal 3Q tumbles, but co. sees recovery signs

Arch Coal Inc. said Friday its third-quarter profits plunged on lower coal prices, but the coal miner suggested that improving operating margins in all regions reflect an emerging turnaround in once-struggling coal markets.

"In light of the 'Great Recession' of 2009, we're pleased to be profitably managing through a severe downturn in energy markets," said Steven Leer, Arch's chairman and CEO. "We are also seeing domestic and global economies begin to transition from recession to recovery."

Arch, which fuels about 8 percent of all U.S. electrical generation, said it is seeing improvements in markets for metallurgical or coking coal used in steelmaking, though the company cautioned that high stockpiles at U.S. power plants likely will dampen steam coal markets in the first half of next year.

Arch Coal earned $25.2 million, or 16 cents per share, on $615 million in revenue in quarter. That's down from profit of $97.8 million, or 68 cents per share, on $769.5 million in revenue during the same period last year.

Analysts surveyed by Thomson Reuters expected earnings of 4 cents per share on revenue of $605.1 million.

The St. Louis-based company,tightened its earnings guidance for the year, saying it now expects 28 cents to 43 cents per share, compared with a July forecast of 25 cents to 55 cents per share.

Analysts have been closely watching the third-quarter performances of coal-mining interests as a gauge of the strength of a recovering manufacturing economy. Observers especially were keeping an eye on sales of metallurgical coal. It's produced in smaller quantities than steam coal for utilities, but sells for more than double the price, often boosting profits.

Arch said it sold 29.1 million tons of coal in the third quarter, an improvement from the 27.4 million tons during the previous three months but down from 34.8 million tons in the third quarter of 2008. John Eaves, Arch's president and chief operating officer, said the company is on pace to sell 2 million tons into the metallurgical and pulverized coal injection markets this year, with plans to more than double it next year.

Eaves also said it would continue efforts to supply the fast-growing Asia-Pacific market with coal used for electricity generation against the backdrop of a "potentially muted" steam-coal market in the U.S. next year.

The average per-ton sales price during the quarter was $20.05, up from $19.43 the previous quarter but lower than $20.38 a year earlier. Arch's per-ton margins improved to $1.86 from 69 cents in the second quarter, but still down from $3.73 during last year's third quarter.

"We are strongly positioned for the upturn which we believe is just beginning to be reflected in coal demand," Leer said. He added that "looking ahead, it's our view that ongoing supply constraints here at home and around the world _ coupled with a rebound in energy demand globally _ will exert upward pressure on coal prices over the long term."

Daniel Scott, an analyst with Dahlman Rose & Co., wrote in a research note that Arch's better-than-expected earnings can be attributed to very strong cost control and higher sales volume in the so-called Western Bituminous region spanning southern Wyoming, Colorado and Utah after various operating troubles crimped results earlier this year.

Still, Scott cautioned that "the continued deterioration of market conditions in the (Arch's key operations in Wyoming's Powder River Basin) may mean third-quarter results are not sustainable."

Arch raised its 2009 sales volume forecast to a range of 121 million to 125 million tons from a prior forecast of 114 million to 118 million tons, excluding coal purchased from third parties. The increased output partly reflects Arch's newly completed $764 million purchase of a Wyoming coal mine from Rio Tinto Ltd. The deal expanded Arch's foothold in Wyoming's Powder River Basin, which Arch described as the largest, fastest-growing and most cost-competitive coal supply region in the United States. The Jacobs Ranch mine last year produced 42.1 million tons of sub-bituminous coal for sale to U.S. power generators.

Shares of Arch Coal slipped 44 cents to $22.66 in midday trading.

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