Arch Coal boosts profit in 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 the coming years.

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,” said 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 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 and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) doubled to US$540 million when compared to 2005.

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

The St. Louis, MO-based company is the United States’ second biggest coal producer 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 rebuild the generator coal stockpile levels all affected coal consumption 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 volume by 3.4 million tons to 25.3 million tons in the fourth quarter. Sales volume for 2006 was 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. 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 volume for the region was 18.1 million tons in 2006 compared to 18.2 million tons in 2005.

Average sales price in Western Bituminous increased by US$2.02 per ton in the fourth quarter over the prior year period to US$20.62. Sales price for the year was US$22.42 compared to 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 start-up 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 to 30.5 million tons in 2005 because the company sold select operations in December 2005. Average sales price rose by US$9.29 per ton in the fourth quarter of 2006 compared to 2005 to US$52.28 per ton.

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

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