As prospects for a carbon cap and trade mechanism diminished over the last quarter, coal miners have seen share prices rise to near or above 52-week highs. Arch Coal Inc. (ACI), Massey Energy (MEE), and Peabody Energy (BTU) set new highs in January, and Massey even recorded a second high in April before the disaster at its West Virginia mine that killed 29 miners.
Arch Coal reported first quarter earnings this morning, and if the likelihood of a cap and trade bill is waning, coal prices in the quarter did not support good news for the miner. Adjusted to eliminate a one-time charge, Arch reported EPS of $0.03, below estimates of $0.08. Revenues in the quarter were up nearly $31 million, or 4.5%, from the same period a year ago on a rise in total shipments of 6.9 million tons. However revenues of $712 million missed consensus estimates of $725 million.
The problem was operating margins, which decreased by $0.10/ton year-over-year. Margins increased $0.11/ton sequentially, though, and that is what Arch is pointing to as an indicator of things to come.
The company experienced softer sales in steam coal as US power generators worked through higher than average stockpiles. Now that those stockpiles have been whittled down, Arch expects steam coal sales to rise for the rest of 2010.
In addition to more shipments of steam coal, the company expects its shipments of metallurgical coal to increase as demand for steel rises with the recovering US and global economies. Arch expects to ship 147-155 million tons of coal in all of 2010, and plans to boost its shipments of metallurgical and pulverized coal injection (PCI) coal to between 6-7 million tons. Metallurgical and PCI coal sell for higher prices than steam coal, and the company will shift uncommitted steam coal volumes into metallurgical and PCI markets.
Arch says it will triple its volume of metallurgical coal sales in 2010 compared with 2009, and plans to grow its capacity for the higher-priced coal to 8 million tons by the end of the year.
The company provided new guidance for GAAP EPS of $0.87-$1.26 and adjusted EBITDA of $700-$790 million. Previous guidance called for GAAP EPS of $0.37-$0.86 and adjusted EBITDA of $590-$710 million. The company also raised capex from $200-$220 million to $315-$335 million. Clearly the company thinks it coal markets will improve substantially for the rest of the year.
Arch did predict in January that the first quarter of 2010 would be weak, in fact the weakest of the year. The company did put on a weak show for the quarter, so now it remains to be seen if the predictions of coming strength come true. Analysts’ EPS estimates for the second quarter are $0.22 and for the full year, EPS consensus estimates are $0.89. Arch is projecting a much better year than that. Time will tell.
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