Coal companies continue to present their earnings reports. Following Peabody Energy (BTU), Arch Coal (ACI) released its first quarter results. The company reported an adjusted net loss of $72 mln, in line with analyst expectations. As of this writing, ACI was under pressure, down almost 6% for the day.
As coal prices were low, there is no surprise that revenues declined more than 20% year-over-year. The price environment continued to deteriorate in comparison with the last quarter of 2012. Average sales price per ton was $21.66 in the first quarter of 2013, down 10.5% from $24.21 that was achieved in the fourth quarter of 2012.
Just like BTU, ACI was bullish on coal prices in its earnings release. Nevertheless, I think Arch Coal makes some good points. The company projects US coal consumption for power generation to increase by 50 mln tons in 2013. At the same time, US coal production totaled 246 mln tons in the first quarter of 2013 compared with 268 mln tons in the same quarter of last year. When demand is rising and supply is shrinking, prices must eventually go up.
Coal prices are beyond the control of the company. The most important thing that is in the company's control is cost management. Cash cost per ton was $18.02 in the first quarter of 2013, down 7.3% from the last quarter of 2012. The company is effectively implementing its cost-cutting strategy. If we compare quarterly year-over-year results, cash cost per ton diminished by 10.7%.
Arch Coal's cash position looks solid to me. ACI has $730 mln in cash and cash equivalents and $248 mln in short-term investments as of March, 31. Long-term debt is $5.08 bln. This is a big number given the current market situation. The good thing is the schedule of the debt. The first major payment is $600 mln due 2016. This is three years from now. Then, $1.65 bln is due in 2018. Other debt is due in 2019, 2020 and 2021. Solvency is not an issue for ACI, although the dynamics of the stock price can be scary. Since the beginning of the year, ACI lost almost 40% and is trading near $4.50.
ACI is attractive at current levels. I think that coal prices will stabilize and gradually rise in the second half of the year. While the US coal production is falling, as stated in Arch Coal's report, stockpile levels will fall too. ACI states that more than 100 gigawatts of new coal-fueled plants are expected to start production in 2013. This would result in more than 300 mln metric tons of demand this year. More demand means more upside pressure on coal prices. It would take some time for these plants to start operating, and the increase in demand would be seen in the second part of the year. Price is the most important factor for the company's revenue. Rising prices would lift the stock.
ACI implemented a good cost cutting strategy and would benefit from it when the prices are higher. There is nothing to worry about in terms of debt and liquidity. However, I should add one important point. Buying ACI now is for investors who can tolerate a significant downside. The market does not like coal companies now. Even if the fundamentals are right, they could be ignored for a significant amount of time. The whole spectrum of commodities and commodity-related stocks is under pressure. ACI's price could be influenced by non-related commodities because funds could be forced to liquidate their positions. Most investors would find it more comfortable to wait and see at what price ACI does find a support.