Arch Coal 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“On the domestic thermal front, we believe that we’re in early stages of a multiyear recovery from PRB. Natural gas prices are less of a headwind. Weather has normalized to some extent, and power demand’s up. Coal has regained ground in the electric generation market. U.S. production is down, and coal stockpiles at PRB soar [ph] plans are on the decline. In fact, we believe the summer burn season will drive days of the supply and PRB customers down to below the 5-year average. This trend is a significant turnaround from where we were just a year ago and is leading to increased customer interest in securing tonnage.”

“While met coal demand remains relatively stable, driven in part by solid utilization rates at U.S. steel mills, prices are muted, and supply rationalization to date has not been sufficient to balance the market.”

“Michael, if you just look at industry data for June 30, production industry was down about 20 million tons. A big part of that is, in fact, about 12 million or 13 million tons. We think cash is going to continue to be under pressure. We think you will continue to see that transition away from the thermal market into the met market, and there’ll be further pressure on shutdowns in terms of supply. If you look at gas prices right now at $3.50, Central App thermal coal will not dispatch at $3.50 gas. And we think PRB, Western Bit, even Illinois will do fine with gas prices in that level. But as you’ve heard me say many times, we need somewhere between $4.50 and $5 gas to allow the thermal coal to dispatch either. Internal forecast for 2013 at Central App about 20 million, 21 million tons down over 2012. So down around that 128 million ton range for this year. I think, quite frankly, from what we’ve seen first half, that may be high. So there might be more pressure on that the back half.”

“there still is exit supply in the market, and I — it’s a tough number to gauge, but I think we believe that somewhere between 15 billion and 25 billion tons on a worldwide basis. But it appears to be more heavily weighted towards low-vol coals, which is why I think you’re seeing the benchmark pricing down. Clearly, Australian dollar drop has helped those producers, but I think what’s being lost in this is the relative strength of the high-vol coals into Europe. We’re down through the year, maybe $5 or $8, but it’s not nearly the percentage of what we’re seeing in — on the benchmark pricing.”

“I got to tell you everybody in this environment is pretty inwardly focused, I would say. Not that you won’t see some M&A, but everybody’s focused on managing their balance sheet, making sure they get through this tough period, and let’s just see where goes. But if you’re a Central App supplier and you’ve got some higher costs and pretty much thermal coal and you don’t have any infrastructure in place to access the international markets, I think you’re going to be pretty challenged over the next couple of years. So whether they go away, become part of another company, I think time will tell.”

“we’ve got over 400 million tons of high-quality met with a cost structure we think can be competitive here and around the world. And we want to make sure that we protect those reserves and aren’t forcing them into a market that doesn’t want them.”

“Chris, as I indicated, in the 300 million ton [met] market, we think there is a pretty significant percentage of people that have economics that don’t work at 145…we think it’s probably at least 20%”

“I can tell you there’s a lot of high-cost met out there, whether it’s in the U.S., Australia or Canada. And those are things that some people are going to face between now and, say, over the next few quarters. So we think there’s rationalization coming. We just can’t tell you how quick that’s going to take place, but what we can tell you is Arch has got itself positioned where it will be standing when all this shakes out.”

“If you look globally, there’s 280 gigawatts of new coal power generation that are being built. I mean, these aren’t being discussed, planned. They are being built and are going to come on over the next 3 or 4 years, needing 800 million to 900 million tonnage of additional supplies. So all of those things, we think, will drive improvements in the market. I mean, it’s — as John talked about our cash position, we want to make sure that we got liquidity in place to get through this tough period. We can’t tell you if it’s 6 months, 12 months or 18 months, but what we can tell you is Arch will be around once we get through it.”

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