Arch Coal to Underperform - Analyst Blog

By Zacks Equity Research,

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We have moved to an Underperform recommendation on Arch Coal Inc. ( ACI ) due to the recent difficulties faced at the company's PRB operations as well as longwall outage at Mountain Laurel (Appalachia). Arch Coal's third quarter missed on account of the Midwestern flooding and the geological challenges in Appalachia, offset in part by improved metallurgical coal shipments and robust met coal pricing.

Earlier this month, Arch Coal said it was scaling back production at the Dugout Canyon mine near Wellington, Utah, in response to continuing weakness in coal demand in the region. In keeping with this market-driven decision, Canyon Fuel, a subsidiary of Arch Coal, eliminated a total of 114 jobs at the mine, and plans to suspend longwall operations at the end of the current panel, currently planned for the first half of 2012. 

Arch Coal's profitability is economically tied to the price realized from selling coal extracted from its mines. Recent data suggests that coal prices continue to recover from the impact of the economic downturn, driven by the rise in steel and electricity demand. However, ongoing regulatory challenges, reserve degradation and soft steam market conditions in Central Appalachia may impact the company's prospects of achieving production growth.

Going forward, increased regulation and substitution of alternate energy sources, specifically natural gas, continue to be major risks for coal miners like Arch Coal. The new emission rules, including the Cross-State Air Pollution Rule and the Map Rule, are expected to push older coal plants into early retirement. With these rules, Arch Coal estimates nearly 35 gigawatts of industry coal capacity face risk of closure over the next decade, impacting coal demand by some 40 million tons or so.

Though we believe the company's well-capitalized, low-cost operations provide a competitive edge over smaller players in the industry, we stay on the sidelines for Arch Coal stock until we see recovery in PRB operations and the Appalachian longwalls. Arch Coal presently has a Zacks #5 Rank, which translates into a short term 'Strong Sell' rating.

Based in St. Louis, Missouri, Arch Coal engages in the production and sale of steam and metallurgical coal. The company also ships coal to domestic and international steel manufacturers as well as international power producers. The company mainly competes with Alpha Natural Resources Inc. ( ANR ) and CONSOL Energy Inc. ( CNX ).

ARCH COAL INC ( ACI ): Free Stock Analysis Report
ALPHA NATRL RES ( ANR ): Free Stock Analysis Report
CONSOL ENERGY ( CNX ): Free Stock Analysis Report
Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: ACI , ANR , CNX

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