Arch Coal has stellar 2006

Arch Coal (ACI-N) is battling the weak American coal market by slashing its production target this year in anticipation of an upturn in years to come.

The company expects to produce between 130 million and 135 million tons in 2007 — roughly what it sold in 2006.

“We are confident that leaving more tons in the ground is the right decision,” says chairman and CEO Steven Leer. “It would be a mistake to force additional tons into a market that is currently oversupplied, particularly when the underlying long-term market fundamentals continue to be very strong.”

The company’s net income in 2006 was US$260.6 million, or US$1.80 per fully diluted share, compared with US$22.5 million, or US17 per share in 2005.

Income from operations more than quadrupled over 2005 to US$336.70 million last year and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) doubled to US$540 million.

The company posted a net income of US$79.5 million, or US55 per share, in the fourth quarter of 2006, compared with a loss of $1 million, or a penny per share, during the same period in 2005.

The St. Louis, Mo.-based company is the second-biggest coal producer in the United States after Peabody Energy (BTU-N). Arch Coal contributes about 12% of America’s coal supply from its 11 mining complexes and provided U.S. utilities with the fuel for roughly 6% of the nation’s electricity.

Mild weather, better than expected performance by competing fuels, increased coal production and a rebuilding of the generator coal stockpile levels all affected coal consumption in 2006.

Arch Coal estimates coal consumption for power fell by about 0.9% while the economy grew by 3.4%, which has only happened four times in the past 56 years.

The company reopened the Coal Creek surface mine in the Powder River Basin in Wyoming in 2006, which helped increase sales by 3.4 million tons to 25.3 million tons in the fourth quarter. Sales for 2006 were 96.2 million tons, up from 90 million tons in 2005.

Arch Coal experienced rail disruptions in the Powder River Basin during the second half of last year from major maintenance and repair work, which continued into 2006, causing the company to lose 12 days of production. The average sales price increased to US$10.82 per ton in 2006 from US$8.26 per ton in 2005.

Also in 2006, the company opened the Skyline underground mine in the Western Bituminous region, which includes Colorado, Utah and southern Wyoming. Sales volume increased by 1.2 million tons in the fourth quarter over 2005 to 5.4 million tons, reflecting a longwall outage at the West Elk mine in the fourth quarter of 2005. Total sales for the region were 18.1 million tons in 2006 compared with 18.2 million tons in 2005.

The average sales price in the Western Bituminous region increased by US$2.02 per ton in the fourth quarter over the same period in 2005 to US$20.62. The average sales price for the entire year was US$22.42 compared with US$19.01 in 2005.

A third expansion that Arch Coal is working on is the Mountain Laurel complex in Central Appalachia region of southern West Virginia, eastern Kentucky and Virginia, which will become the centrepiece of the region’s operations by 2008. The startup of the longwall at Mountain Laurel’s underground mine is expected to replace the production at the depleting longwall at the Mingo Logan complex.

Sales volume in Central Appalachia decreased to 13.1 million tons in 2006 from 30.5 million tons in 2005 because the company sold select operations in December 2005. The average sales price rose by US$9.29 per ton in the fourth quarter of 2006 compared with US$52.28 per ton in the same period of the previous year.

Arch Coal has signed commitments for about 15 million tons of coal for 2007 and 5 million tons for 2008 that exceed 2006 prices.

The company has unpriced volumes between 75 and 85 million tons of coal for 2008 and 110 to 120 million tons in 2009.

Top 10 Hard Coal Producers

(millions of tonnes)

China2,226

U.S.951

India398

Australia301

South Africa240

Russia222

Indonesia140

Poland98

Kazakhstan79

Colombia61

Source: World Coal Institute

Hard Coal Consumption

Source: World Coal Institute