Editorial: Arch Coal teeters under heavy debt, seeks bankruptcy protection

The deep convulsions in the ailing U.S. coal-mining sector are continuing unabated into the new year, with America’s second-largest coal miner, Arch Coal, seeking bankruptcy protection on Jan. 11.

With thermal and metallurgical coal prices off 50% since 2011, a full quarter of U.S. coal production is undergoing bankruptcy reorganization, with Arch’s rivals Walter Energy, Alpha Natural Resources and Patriot Coal all filing for court protection within the past year.

The long-term downtrend in coal prices is widely attributed to natural gas providing a cheaper and cleaner alternative for power production; much tighter U.S. environmental regulation for coal burning; and the slowing global economy translating to lower demand for metallurgical coal for steelmaking, especially in China.

After the Chapter 11 announcement, Arch Coal stock dropped to a mere US15¢, off 74% on the day and generating a US$3.2-million market capitalization, based on 21.3 million shares outstanding. The stock is now kicked off the New York Stock Exchange and trades over the counter. Arch Coal traded at US$4 per share as recently as mid-October, for a market cap of US$85 million. In early 2011, just before the global downturn in commodity prices, the stock had traded for months in the US$35 range, and you have to go back almost a decade to find when the stock traded above US$100 per share.

In reaction to Arch Coal’s news, America’s largest coal miner, Peabody Energy, saw its stock tumble 33% to US$4.48 per share over two days on renewed bankruptcy fears, even as the company renegotiated US$4.5 billion of its US$6.3 billion in debt. With a market cap of only US$98 million, Peabody is getting close to the New York Stock Exchange’s lower limit of US$50 million to stay eligible for listing.

Arch Coal is starting 2016 with US$4.5 billion in debt, US$600 million in cash and a US$275-million bankruptcy loan lined up. The debt is a remnant of its ill-starred purchase of International Coal Group in 2011.

The good news for Arch’s 4,600 workers and customers is that Arch Coal intends to operate its mines during the bankruptcy proceedings, and indeed, the company said all its operations were cash-flow positive in the first three quarters of 2015, thanks to the company having already cut costs in recent years.

Predictably enough, it’s the common shareholders who will end up hit the hardest, being diluted to the max by the secured debt holders who will become almost the entire owners of Arch.

Arch Coal’s corporate form after this wealth transfer is anyone’s guess, but the trend of recent years is for the larger U.S. coal miners to be taken private and broken up into smaller corporate entities, with wages rolled back up to 50% into the US$20-per-hour range for a starting wage in Appalachia.

Beyond that, thermal coal still has a prominent place in the U.S. energy mix. While down from providing for almost half of all U.S. electricity generation as recently as the mid-2000s, coal still accounts for a third today, and it’s above the growing contribution of natural gas. U.S. coal production has fallen from peak 2007–08 levels of 1.1 billion tons per year, but could reach 900 million tons in 2015 and 850 million tons this year.

Government data shows that the small mines in America’s Central Appalachian region have fared the worst during the downturn, with output down 40% in 2015 while mine production is only down 15% in the Wyoming basin, and up 8% in the higher-quality Illinois basin, where Arch has most of its assets.

Environmentalists are concerned that the spate of bankruptcy filings amongst the U.S. coal miners may keep these companies from fulfilling their remediation obligations, but so far Arch says it has the financial capacity to fulfill these obligations, despite its restructuring.