On Monday, December 9, Arch Coal (ACI) announced that it had begun operating its longwall mining system at the Leer Mine (located in the northern region of West Virginia). The Leer Mine, which is expected to ramp up production during the first quarter of 2014, is also expected to consistently produce between 3.0 and 3.5 million tons of coal on each year on a year-over-year basis.
In the wake of Monday's positive news, I wanted to not only briefly discuss the company's operations at its Leer Mine facility, but also highlight a number of reasons why I'm staying fairly bullish on shares of this particular metals & mining play.
Leer Mine - Tygart Valley - Grafton, West Virginia
According to the company's website, the Leer Mine initiated production in late 2011 and completed the installation of its longwall in late 2013. Tygart Valley's high-volume "A" coal quality ranks as metallurgical and PCI-grade, which is used for steel-making.
It should be noted that since 2011 Arch has invested more than $400 million to develop the Leer mine, and if the production estimates (which are calling for the mine to produce between 3.0 and 3.5 million tons of coal each year) can be met and/or exceeded I see no reason why Arch Coal can't realize a significant on return on its $400 million dollar investment over the next 5-7 years.
Recent Performance & Trend Behavior
On Monday, December 9, shares of ACI, which currently possess a market cap of $965.11 million, and a dividend yield of 2.64% ($0.12), settled at a price of $4.55/share.
Based on their closing price of $4.55/share, shares of ACI are trading 8.13% above their 20-day simple moving average, 10.23% above their 50-day simple moving average, and 0.69% above their 200-day simple moving average. These numbers indicate a short-term, mid-term, and long-term uptrend for the stock which generally translates into a moderate buying mode for most long-term investors.
A Note on Arch Coal's Recent Dividend Behavior
Since May 30, 2012, the company has maintained its quarterly dividend of $0.03/share whereas its industry peer, Vale S.A. (VALE), had actually reduced its semi-annual dividend payout from $0.589/share to $0.437/share over that same period.
Although the company has maintained its quarterly dividend distribution over the past 18-months, I strongly believe that if ACI can meet and/or exceed annual production estimates not only at its Leer Mine but at a number of other facilities, and also demonstrate an increase in its distributable cash flows, then there's a very good chance we could see a pop in the company's dividend over the next 12-18 months.
Looking Ahead to Q4 Estimates
By looking ahead to the company's Q4 earnings, in which analysts are calling for ACI to lose $0.34/share in terms of EPS (which is $0.03/share higher than the -$0.31/share loss the company had reported during Q3) and generate $821.12 million in terms of revenue (which is just about $30 million more than the company had reported during Q3), I think that these estimates can be met or even exceeded.
How is that you ask? If the company can demonstrate an increase in the amount of tons sold (by at least 1.1 million tons on a year-over-year basis), increase its EBITDA (by no less than $125 million over the next 6-12 months), and meet and/or exceed production estimates at its Leer Mine facility (which is estimated to produce 3.0-to-3.5 tons per year over the next several years), I see no reason why such estimates can't be met or even exceeded by a considerable amount.
Risk Factors (Most Recent 10-K)
According to the company's most recent 10-K there are a number of risk factors potential investors should consider before establishing a position in Arch Coal. These risk factors include but are not limited to the following:
Volatility and Downward Changes in the Price of Coal
Volatile coal costs have a direct impact on Arch Coal's industry. ACI's profitability and the value of its coal reserves depend upon the prices it receives for the coal it produces and supplies. The contract prices the company receives in the future for coal it supplies depends upon a number of factors, which include: the domestic and foreign supply and demand for coal, the quantity and quality of coal available from competitors, the domestic and foreign air emission standards for coal-fueled power plants and the ability of coal-fueled power plants to meet these standards, and domestic and foreign economic conditions, including economic slowdowns.
A Decline in the Demand for Metallurgical Coal
Portions of the company's coal reserves possess quality characteristics that enable it to mine, process and market these reserves as either metallurgical coal or high quality steam coal, depending on the prevailing conditions in the metallurgical and steam coal markets.
The company will decide whether to mine, process and market these coals as metallurgical or steam coal based on management's assessment as to which market is likely to provide ACI with a higher margin. It considers a number of factors when making this assessment, including the difference between the current and anticipated future market prices of steam coal and metallurgical coal and the increased costs incurred in producing coal for sale in the metallurgical market instead of the steam market.
A decline in the metallurgical market relative to the steam market could cause the company, as well as its competitors, to shift coal from the metallurgical market to the steam market, thereby reducing its revenues and profitability and increasing the availability of coal to customers in the steam market.
For those of you who may be considering a position in Arch Coal I'd keep a watchful eye on a number of things over the next 12-24 months as each could play a role in both the company's near-term and long-term growth.
For example, near-term investors should focus on the company's recent performance and trend behavior while longer-term investors should focus on the company's dividend behavior over the next 12-18 months, as well as its ability to meet and/or exceed the production estimates that are calling for the company to produce 3.0-to-3.5 million tons of coal each year from its Leer Mine facility.