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Jettisoning a Struggling Business Can Be Tough

By Reuben Gregg Brewer - Mar 4, 2014 at 10:20AM

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Arch Coal is selling a mining equipment business to focus more on coal—and to get out of a sector that's hurting.

Arch Coal (NYSE: ACI) has been bleeding red ink for over a year. It's cutting back and keeping costs low, trying to ensure it can survive the coal market's dark days. It just announced plans to sell its ADDCAR mining equipment business, which will not only help it focus on coal but gets it out of a struggling market that's holding back giants like Joy Global ( JOY ) and Caterpillar ( CAT 0.51% ).

Coal problems
The first problem that Arch is dealing with is coal. It sells thermal coal out of the Powder River Basin (PRB) and metallurgical coal. Last year was rough on both of its main products. The company turned in a full year loss of $1.08 a share, nearly triple the loss it posted in 2012.

That said, PRB coal appears to be stabilizing somewhat, with Gregory Boyce, CEO of competitor Peabody Energy ( BTU ), noting that, "...PRB prices were up nearly 40% from their lows of last year." That was a number echoed by Arch's CEO, John Eaves.

Colin Marshall, CEO of PRB focused Cloud Peak Energy ( CLD ), commented that "...we hope to see a continuation of recent increases in prices over the next few months. Hopefully, the recent cold weather across much of the U.S., and volatile natural gas prices will remind utilities and regulators of the importance of coal generation in providing low cost, reliable electricity..."

Basically Cloud Peak, Peabody, and Arch, three of the biggest players in the PRB, are on the same page about the region's solidifying prospects. Unfortunately for Arch, the met market isn't yet turning the corner. That's a notable issue because margins in the met business are much wider than on the thermal side. Since met is about 45% of Arch's business, Arch has a ways to go before its coal troubles are over.

Selling to focus, or...
That's why Eaves highlighted the company's, "ongoing efforts to monetize non-core assets..." when the sale of ADDCAR was announced. The goal was to, "...sharpen our focus on our core competencies – mining and marketing coal." That's nice, but it also got Arch out of another struggling business.

Mining equipment specialist Joy Global, for example, saw sales decline 11% in fiscal 2013, ended October. However, fiscal fourth quarter sales were down nearly 26%. And, perhaps more concerning for Arch, executive vice president Edward Doheny specifically highlighted equipment sales in the met market as an indication of additional supply coming on in an already oversupplied sector. That's likely to keep met prices down for awhile.

But Joy isn't alone in its struggles. Caterpillar has also been finding the mining industry a rough slog. This equipment giant saw mining equipment sales fall by a massive 48% in the fourth quarter. Worse, in the company's press release it noted, "we expect sales of mining equipment will remain weak in 2014 and our outlook reflects a sales decline of about 10 percent in Resource Industries." Resource Industries is the company's mining segment.

Clearly, Caterpillar and Joy Global look like they are in for a tough 2014. Although Arch will have its own issues to deal with on the coal front, at least it will have one less headache once it jettisons ADDCAR.

A good move, but stay tuned
At the end of the day, selling ADDCAR was a good move for Arch. However, the company bought its way into the met market at peak prices and is now saddled with extra debt as the coal industry has hit the skids. The $21 million ADDCAR sale won't help all that much on that front, but it does augment the company's over $1.2 billion in cash.

If Joy is right about the met market, Arch may need every penny of that to get through the downturn. But at least management appears to be making the right moves to ensure that it does, in fact, see the other side.

While coal is a turnaround play, this industry trend isn't...

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