We upgrade our recommendation to Neutral from Underperform on
Arch Coal Inc
). The company reported mixed financial results in the second
quarter of 2012.
We believe the company's coal prospects look encouraging in the
forthcoming quarters with a gradual increase in demand for coal
from the Asian, European and Middle Eastern markets. In addition,
train traffic increasing out of Powder River Basin ("PRB") and
projected start-up of long-wall operations in the Leer mine would
contribute substantially to the company's top-line.
We believe Arch Coal's strategy to shift its resources to core
operations will reduce its capital spending on low return units.
This will enable the company to divert the proceeds towards
development of lucrative projects as well as for modernization
Also on a positive note, Arch Coal's comparative advantage in
mining costs over countries like Australia, Indonesia, Canada and
Russia is expected to boost the company's revenue and will aid in
weathering the current downturn and strengthening its position in
However, these growth opportunities could be tempered by
softened global and U.S. demand for steel from coal companies which
will influence Arch Coal's financials in the following quarters. In
addition, increasing substitution of coal with natural gas could
drive down coal prices and impact the company's margins. This will
be compounded by increases in coal stockpiles which will adversely
affect the company's production and hence its profitability
In 2012, the company expects to sell 135.5-141.5 million tons of
coal, which includes 128-134 million tons of thermal coal and 7.5
million tons of metallurgical coal. The company's capital
expenditure in 2012 will likely be in the range of $410-$430
The Zacks Consensus Estimates for the third quarter and full
year 2012 are currently pegged at losses of 14 cents and 42 cents,
respectively. Arch Coal's closest peer is Virginia-based
Alpha Natural Resources, Inc.
The company presently holds a Zacks #3 Rank, which translates
into a short-term Hold rating. Arch Coal engages in the production
and sale of steam and metallurgical coal from surface and
underground mines located in the United States. With market
capitalization of $1.45 billion, the company at the moment has
7,400 full time employees.
ARCH COAL INC (ACI): Free Stock Analysis Report
ALPHA NATRL RES (ANR): Free Stock Analysis
To read this article on Zacks.com click here.