Arch Coal, Inc. Earnings: How Bad Will They Get?

Arch Coal (NYSE: ACI) will release its quarterly report on Tuesday, and investors are bracing themselves for another scary earnings report from the coal producer. Even though fellow coal producers Peabody Energy (BTU +0.00%) and Alpha Natural Resources (NYSE: ANR) are also having to deal with ongoing weak coal prices, Arch in particular has some operational challenges unique to its particular mining properties that could weigh even more heavily on its earnings.

Coal companies in general have performed badly in recent years, as cheap new supplies of natural gas have encouraged coal's heaviest users to shift their energy consumption to the cleaner-burning fuel. As a result, Peabody, Alpha Natural, and Arch have all had to look toward alternative sources of demand for their products. Yet most investors still foresee ongoing losses for Arch Coal unless the market for coal around the world finally recovers more sharply. Let's take an early look at what's been happening with Arch Coal over the past quarter and what we're likely to see in its report.

Stats on Arch Coal

Source: Yahoo! Finance.

What will happen to Arch Coal earnings this quarter?
In recent months, analysts have gotten even more pessimistic in their assessment of Arch Coal earnings prospects. They've widened their loss projections for the fourth quarter by $0.04 per share, and they now expect $0.20 per share more in losses for the full 2014 year. The stock has reflected those concerns, falling another 1% since late October.

We've already gotten a sense of what Arch Coal's fourth quarter will look like, as the company gave a preliminary warning about its coming results. Arch said that its metallurgical coal sales for the year came in below the lowest end of its expected range. Moreover, the company pointed to challenges at its Mountain Laurel facility that resulted in a 40% drop in production due to factors related to the geology of the mine, and it also cited difficulties in obtaining rail service at its Powder River mines as weighing on its ability to ship coal.

Photo credit: Flickr/Alison Christine.

Ongoing weakness in coal prices is the main culprit for Arch Coal. In its third quarter, Arch did a great job of cutting its operating costs by almost 12% to just $19.37 per ton. Yet average sales prices fell even further, with discouraging volumes in both thermal and metallurgical coal shipments. Even as the company follows the lead of Alpha Natural Resources and Walter Energy (WLT +0.00%) in trying to shift more of its production toward higher-priced met-coal, Arch Coal will still get about 95% of its production volume from the thermal side of the business.

Even stronger players in the industry are having trouble producing good results. Peabody Energy has historically been more profitable than Arch and most of their coal peers, but last week, Peabody reported adjusted results that roughly broke even, suffering the same problems from plunging coal prices despite its strategically located reserves in areas like the western U.S. and Australia.

The big question for Arch is whether it can take advantage of rising overseas demand for coal. China and India have seen huge increases in coal use recently, with China having set an import record last month. Yet until other coal producers become unable or unwilling to keep operating in the industry, price increases could be long in coming.

In the Arch Coal earnings report, watch closely for signs of how long the company can sustain losses of this magnitude. Without a turnaround and continued cost-cutting measures, Arch Coal will likely continue to see its stock price remain under pressure for the foreseeable future.

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