Tags: Arch | Coal | acquisition | ACI

Arch Coal Acquisition Dead Weight for Now

By    |   Friday, 16 Dec 2011 05:08 PM

America's second-largest coal producer, Arch Coal (ACI), made a big acquisition in summer 2011. By autum it appears the purchase is dead weight, as the company’s total value has fallen below the purchase price. Investors now must decide if this is a temporary setback or if the company has permanent problems.

Arch Coal has the second-largest amount of proven coal reserves in the United States. The company owns coal mines in all of the major coal production areas and produces both thermal coal and met coal. Thermal coal is used in electricity generation plants. Higher quality, but higher cost, met coal is required for the production of steel.

In June 2011, Arch Coal completed the acquisition of International Coal Group. The addition significantly increased the company's current and projected future production of met coal.

For the 2011 third quarter, Arch Coal reported revenue of $1.2 billion, up 37 percent from $875 million. The increase was due to the added production in the quarter from ICG. Net income for the quarter was 9 cents per share, down from 29 cents.

For the first nine months of the year, reported net income was 45 cents per share, down from 69 cents a year earlier. Arch Coal took non-cash expense of depreciation, depletion and amortization charges of almost four times the net income, year to date.

The quarterly earnings report did note record free cash flow of $255 million for the quarter compared to reported net income of $19 million.

Global growth

In company literature, Arch Coal management discusses the long term global growth of coal use as the driving factor for future profitability of the company. Coal imports for India and China are forecast to double in the next five years for the thermal coal market. Worldwide production of steel is forecast to increase by 60 percent, requiring ever larger amounts of met coal.

In the short term, increasing expenses since the ICG merger have resulted in a drop in earnings and the share price. In June 2011, Arch Coal paid $3.4 billion for International Coal Group. By December 2011, the market cap of Arch Coal was only $3.3 billion.

Recently, the analysts at Dahlman Rose reiterated their buy rating on ACI with a target price more the double the current share price. The buy or outperform rating is the norm for recent analyst comments, with a consensus target price of $30.

The company reports next on January 27.

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America's second-largest coal producer, Arch Coal (ACI), made a big acquisition in summer 2011. By autum it appears the purchase is dead weight, as the company s total value has fallen below the purchase price. Investors now must decide if this is a temporary setback or if...
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2011-08-16
Friday, 16 Dec 2011 05:08 PM
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