Strategy Report - Arch Coal

Executive Summary

As one of the world’s largest coal producers. For the year ended December 31, 2014, we sold approximately 134 million tons of coal, including in the region of 1.3 million tons of coal we purchased from third parties. We sell largely the whole lot of our coal to power plants, steel mills and industrial facilities. At December 31, 2014, we operated, or contracted out the process of, 16 functioning mines located in each of the major coal-producing regions of the United States. The locales of our mines and access to export facilities allow us to ship coal worldwide.  On January 11, 2016, Arch Coal publicized that it came to an agreement with the majority of its senior lenders on the terms of a financial restructuring that is expected to eradicate more than $4.5 billion in debt from Arch’s balance sheet and position the company for lasting financial success. To aid with this financial restructuring, Arch elected to file for reorganization under Chapter 11 of the Bankruptcy Code.  Our mining operations and customer shipments will continue in the ordinary course during this court-supervised process.

Arch remains to be one of the strongest competitors in the industry – held by our large-scale and low-cost processes. The court-supervised process will allow us to continue to operate in the regular course. We absolutely expect to carry on paying our employees, suppliers and vendors and to deliver excellent customer service, while we reinforce our position as a prominent miner and marketer of coal.

Our History

We were established in Delaware in 1969 as Arch Mineral Corporation. In July 1997, we merged with Ashland Coal, Inc., a subsidiary of Ashland Inc. that was developed in 1975. As an outcome of the merger, we became one of the biggest producers of low-sulfur coal in the eastern United States.  In June 1998, we developed into the western United States when we purchased the coal assets of Atlantic Richfield Company. This purchase included the Black Thunder and Coal Creek mines in the Powder River Basin of Wyoming, the West Elk mine in Colorado and a 65% interest in Canyon Fuel Company, which managed three mines in Utah. In October 1998, we purchased a leasehold interest in the Thundercloud reserve, a 412-million-ton federal reserve tract next to the Black Thunder mine.  In July 2004, we bought the last 35% interest in Canyon Fuel Company. In August 2004, we purchased Triton Coal Company’s North Rochelle mine bordering our Black Thunder operation. In September 2004, we obtained a leasehold interest in the Little Thunder reserve, a 719-million-ton federal reserve tract neighboring the Black Thunder mine.  In December 2005, we sold the stock of Hobet Mining, Inc., Apogee Coal Company and

Catenary Coal Company and their four linked mining complexes and roughly 455 million tons of coal reserves in Central Appalachia to Magnum Coal Company, which was eventually procured by Patriot Coal Corporation.  In October 2009, we purchased Rio Tinto’s Jacobs Ranch mine complex in the Powder River Basin of Wyoming, which was comprised of 345 million tons of low-cost, low-sulfur coal reserves, and joined it into the Black Thunder mine.  In June 2011, we secured International Coal Group, Inc., which kept and ran mines primarily in the Appalachian Region of the United States.  In August 2013, we sold the equity interests of Canyon Fuel Company, LLC (‘‘Canyon Fuel’’), which owned and ran our Utah operations.  

SWOT ANALYSIS

Arch Coal, Inc. is one of the greatest low-sulfur coal producers in the US. The company produces steam and metallurgical coal from exterior and underground mines for sale to utility, industrial, and export markets. A strong market position provides it with a competitive edge. However, intensifying competition in the industry and stringent environmental regulations can adversely impact the financial condition of the company.

Strengths

• Dominant position in the US coal industry

ACI is one of the biggest coal producers in the US. As of December 31, 2014, the company sold about 134 million tons of coal, including roughly 1.3 million tons of coal the company acquired from third parties.

• A strong market position of the company provides it with a competitive edge.

Weaknesses

• Dependence on third parties

ACI uses independent contractors to mine coal at certain of its mining complexes, including select operations in its Appalachian segment. In addition, it purchases coal from third parties that the company sells to its customers. Operational difficulties at contractor-operated mines or mines operated by third parties from whom the company purchase coal, changes in demand for contract miners from other coal producers, and other factors could impact the availability, pricing, and quality of coal produced for or purchased by ACI.

• Highly indebted

ACI is highly leveraged. At the end of FY2014, the company had consolidated indebtedness of approximately $5.2 billion. In addition, ACI has significant lease and royalty obligations. Robust debt position impacts the revenues and margins of the company as ACI needs to allocate substantial amounts of its cash flows to repay the debt and interest on the debt. This reduces its cash flows which can be used to expand its operations thus impacting its growth initiatives as well.

Opportunities

• Increasing coal consumption in the US

In the US, coal is used primarily by power plants to generate electricity, by steel companies to create coke for use in blast furnaces, and by a variety of industrial users to heat and fuel foundries, cement plants, paper mills, chemical plants and other manufacturing or processing facilities.

• Growing demand for metallurgical coal worldwide

Metallurgical or coking coal is used in the steel making process. The steel industry uses metallurgical coal, which is different from other types of coal by its high carbon content, low expansion pressure, small sulfur content, and many other chemical features. As such, the price offered by steel makers for metallurgical coal is higher than the price offered by power plants and industrial users for steam coal.

Threats

• Intensely competitive industry

The coal industry is intensely competitive. The most important factors on which ACI competes are coal quality, delivered costs to the customer, and reliability of supply. Some of the company's competitors include Alpha Natural Resources, Cloud Peak Energy, CONSOL Energy, Patriot Coal, Peabody Energy and Walter Energy, are larger than ACI is and have greater financial resources and larger reserve bases than the company does. ACI also competes directly with a number of smaller producers in each of the geographic regions in which it operates. If the price of domestic coal increases, then ACI also has to compete with companies that produce coal from one or more foreign countries, such as Colombia, Indonesia, and Venezuela.