The coal sector continues to be depressed. If emerging nations are to industrialize, the super-cycle theme remains. Storm clouds have gathered over the intermediate term international story with China's growth slowdown hurting thermal export markets and coking coal.
U.S. thermal coal markets have seen the most stress on the back of the natural gas (UNG) glut. In watching the natural gas rig count, I expect a difficult shoulder season for natural gas and coal markets.
Patriot Coal was the first coal company to become bankrupt. Absent a robust coal price recovery, James River (JRCC) has an intermediate term solvency issue. Alpha Natural (ANR) will have solvency and liquidity issues in 2013 if coking coal prices roll over like iron ore has done.
Arch Coal (ACI), meanwhile, looks to live in the land of the walking dead. Arch is the second largest U.S. coal producer and has assets in every U.S. coal producing basin. Sales for 2012 will be over of $4 billion.
Long term debt is $4.4 billion. In a frantic second quarter move Arch completed a refinancing to push out maturities and eliminate covenants. Arch's next debt maturity is not due until 2016 for $590 million. Beginning in 2018 maturities arrive annually.
Second quarter adjusted EBTIDA was only $181 million, while interest expense was $78 million. Cash to end the second quarter was $512 million. Captial spending has been cut drastically and management expects to end the year with "approximately $500 million of cash." Arch has no additional liquidity available.
At this point Arch in survival mode, waiting for coal markets to turn around. The company has no business paying its dividend which is sending out $4.5 million in cash a quarter. If the coal markets do turn around, Arch will need all available working capital to restart idled operations.
The quarter before filing for bankruptcy, Patriot had $338.3 million in liquidity, including a cash balance of $115 million. For context, Patroit's sales level is half that of Arch. One Patriot customer defaulted on a contract and Patroit was forced into bankruptcy. With equity and debt markets effectively closed, Arch Coal is financially vulnerable to a small external shock like Patriot experienced.
In an effort to keep bankruptcy off the table, management noted the possibility of asset sales. Management would not discuss the asset sales in any detail. Options may be available, but are limited.
Before the recent softness in China, Arch had already decreased profitable metallurgical coal expectations. Actual results could be worse still and more importantly, the outlook for 2013 is poor. If the natural gas supply overhang continues Arch's already meager cash flow will decrease.
Arch Coal may be able to continue operate the business without entering into bankruptcy. Meaningful cash flow and profits, however, are not in the foreseeable future while the company will remain vulnerable.
In looking for investments to profit from a rebound in the U.S. thermal coal market, investors ought to avoid Arch Coal. I will continue to monitor the coal markets and look for a rebound.
Additional disclosure: I continue wait patiently for U.S. natural gas supply to decline, at which time the U.S. thermal coal companies may become investable.