“By doing so, we are preserving the value of our low-cost reserves for future periods, when we expect market demand to be stronger.”
Given current weakness in the US coal markets Arch will reduce 2007 production targets to 130-135 million tons.
Leer said it was apparent the market did not require additional tons. “We believe 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,” he said.
With the planned production cuts and the signing of a number of commitments during the fourth quarter of 2006, Arch now has about 11-16Mt of 2007 expected production that has yet to be priced.
Despite the short-term negativity, Arch did benefit during the fourth quarter from the roll-off of lower-priced sale contracts.
For the full year the company reported net income increases to $US260 million versus $22.5 million in 2005.
In the Powder River Basin sales volume increased 3.4Mt in the fourth quarter, driven by the restart of Coal Creek as well as improving rail service during the second half of last year.
In the Western Bituminous Region, sales volume increased 1.2Mt in the fourth quarter compared to the 2005 fourth quarter, reflecting the longwall outage at West Elk in the fourth quarter of 2005 and the start-up of the Skyline mine in the first half of 2006.
In Central Appalachia, average price realisation increased slightly with a larger percentage of metallurgical coal sales and the ending of lower price contracts.
In 2006, Arch completed two of three major expansion projects – the reopening of the Coal Creek surface mine in the Powder River Basin and the addition of the Skyline underground mine in the Western Bituminous Region.
“We believe the restart of these highly competitive low-cost mines – at relatively low capital costs – further enhances our strong competitive position and should deliver significant value for the company in future periods,” Leer said.
Arch also made considerable progress on the development of the Mountain Laurel complex in Central Appalachia.
During the fourth quarter of 2007, the production from the start-up of the longwall at Mountain Laurel’s underground mine is expected to replace the production from the depleting longwall at Mingo Logan.
Arch anticipates that Mountain Laurel’s costs will be substantially lower than Mingo Logan’s, and that this transition will lower overall operating costs at its Central Appalachian operations.
Mingo Logan will continue as a continuous miner operation, with targeted production of approximately 1Mtpa.
Arch will reduce its capital spend this year, targeting total capital spending of $240-280 million.
“Despite the very attractive long-term outlook for US coal, we believe it is simply good business to align capital spending levels with the current soft market environment and our reduced planned production levels,” said Arch chief operating officer John Eaves.
Looking ahead, Arch expects fully diluted earnings per share to be in the range of $1.25-2.00.
Given the current market conditions, including weather-related shipping problems in January, Arch expects the first quarter of 2007 to be particularly challenging.
“Consequently, we expect the first quarter to be our weakest operating period of the year, with Arch’s profitability to be slightly above break-even,” Leer said.
