The dramatically improved results are due to higher average sales realisations, growing premiums for the company’s low-sulfur coal, and overall strengthening in U.S. coal demand, according to Steven F. Leer, Arch's president and chief executive officer.
"If not for previously disclosed disruptions in rail service at several of our operations, Arch's results would have been even stronger. In total, missed shipments and production curtailments related to high inventory levels cost the company an estimated US$8 million during the period," Leer said.
In addition, the company was forced to curtail production during the quarter at the West Elk mine in Colorado and the Black Thunder mine in Wyoming due to high inventory levels stemming from insufficient rail service. Inventory levels increased more than 30% to 9.4 million tons during the year's first half.
Revenues increased 12% for the quarter to US$422.8 million, compared to US$378.9 million during the same period last year. Sales volumes increased 3% to 26.4 million tons, reflecting an increase of 1.5 million tons, or 8.7%, at Arch's western operations, but offset somewhat by a decline of 0.8 million tons, or 9.6%, in the East.
Operating income for the second quarter totaled US$24.9 million, which was nearly three times higher than the US$9.4 million recorded during the same period last year. Adjusted EBITDA increased 19% to US$65.4 million, compared to US$54.8 million in the same period last year.
For the six months ended June 30, net income increased to US$22.5 million, excluding a net gain of US$81.9 million associated with the sale of nearly all of its remaining interest in Natural Resource Partners, charges related to the termination of hedge accounting for interest rate swaps, and severance costs associated with the closing of the Skyline Mine in Utah. Total coal sales for the six months increased 17% to US$826.3 million and coal sales volumes increased 8% to 52.3 million tons, vs. US$706.3 million and 48.3 million tons in 2003.
Arch is continuing to shift more of its eastern production into the metallurgical market, selling about 650,000 tons of metallurgical coal this quarter, an increase of 70% compared to the same period last year.
For the quarter, Arch's average per-ton operating margin rose to US$1.45 per ton, compared to US$0.88 per ton during the same period last year.
Arch also reported it has secured all major permits for a new longwall mine in Logan County, West Virginia to replace Mingo Logan longwall output in late 2006.
Arch expects strong upward momentum in earnings in the third and fourth quarters with the latter expected to be the strongest of the year.
"It is becoming increasingly evident that the fuels with which coal has competed for decades - nuclear, natural gas and hydroelectric - are simply incapable of keeping pace with America's growing demand for power," Leer said. "As a result, domestic coal demand is booming - and the domestic coal market appears to be at the outset of a long and sustained run."
