Arch Resources: A Soft Q2, But A Weak Share Price Makes The Risk Reward Compelling

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Arch Resources is a U.S. coal mining company with a focus on metallurgical coal production.Q2 2024 results show decreased EBITDA and net income, impacted by a lower sales price in the met coal segment...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nArch Resources: A Soft Q2, But A Weak Share Price Makes The Risk Reward Compelling\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-12 15:39 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4713618-arch-resources-q2-but-share-price-weakness-makes-risk-reward-compelling><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Arch Resources is a U.S. coal mining company with a focus on metallurgical coal production.Q2 2024 results show decreased EBITDA and net income, impacted by a lower sales price in the met coal segment...</p>\n\n<a href=\"https://seekingalpha.com/article/4713618-arch-resources-q2-but-share-price-weakness-makes-risk-reward-compelling\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4585","symbol_name":"ETF&股票定投概念","start_time":0,"source_url":"https://seekingalpha.com/article/4713618-arch-resources-q2-but-share-price-weakness-makes-risk-reward-compelling","article_id":"2458785626","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/96390238/image_96390238.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2458785626","pubTimestamp":1723448391,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Arch Resources is a U.S. coal mining company with a focus on metallurgical coal production.Q2 2024 results show decreased EBITDA and net income, impacted by a lower sales price in the met coal segment","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4585":"ETF&股票定投概念","BK4006":"钢铁","BK4588":"碎股","ARCH":"Arch Resources Inc.","CALF":"Pacer US Small Cap Cash Cows 100 ETF","BK4156":"煤与消费用燃料"},"translate_title":"Arch Resources：第二季度疲软，但股价疲软使得风险回报引人注目","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ARCH":1,"CALF":1},"content_text":"Arch Resources is a U.S. coal mining company with a focus on metallurgical coal production.Q2 2024 results show decreased EBITDA and net income, impacted by a lower sales price in the met coal segment.The company returns 100% of discretionary cash flow to shareholders through dividends and buybacks, with a strong balance sheet and low operating costs.   Monty Rakusen Overview Arch Resources (NYSE:ARCH) is a U.S. based and listed coal mining company that I have owned since the summer of 2023. The stock price has seen some weakness lately, but it is still quite a bit above the lows seen last year. I have covered Arch several times over the last year, and the prior articles can be found here. The company released its Q2 2024 result on the 25th of July, which this article will focus on together with my general views on the company. Figure 1 - Source: Koyfin The company has a lot of thermal coal production, with much of that in the Powder River Basin, but most of the EBITDA does normally come from the metallurgical (\"met\") coal segment. So, I primarily view Arch as a met coal producer. Figure 2 - Source: Arch Annual Reports In 2024, the thermal coal segment is expected to roughly break due to the depressed domestic thermal coal prices, which are strongly correlated to natural gas prices that have been softer lately. The less-than-ideal domestic thermal coal conditions might have contributed some to the weakness in Arch stock in 2024, but the weakness is probably more related to the decline in coking coal prices globally and possibly also due to the disruptions to exports from Baltimore during the second quarter of year. The exports for Arch from Baltimore are now running normally. Figure 3 - Source: TradingView Q2 2024 Result Arch reported quarterly revenues of $609M in Q2 2024 and the adjusted EBITDA was $60M in Q2 2024, down 42% compared to $103M in Q1 2024. Net income came in at $15M, down 74% compared to the prior quarter. The EPS in the quarter was $0.81, which missed the consensus EPS estimate of $1.99 by a decent margin. Figure 4 - Source: Arch Quarterly Reports The thermal segment did, similar to last quarter, operate roughly at breakeven, but the segment has been impacted been excessive stripping during the first half of 2024, which will benefit the result in H2 2024 when stripping levels will be below shipping levels. So, we should expect some improvements to the margin in the second half of the year. Figure 5 - Source: Arch Quarterly Reports The met segment did in Q2 have a sales volume of 2.2Mt, on par with Q1 and in line with the annual guidance. This was relatively impressive given the disruptions at the export terminal during much of Q2. Costs were also relatively competitive at $91/t, but the sales price dropped materially in Q2 to $132/t, which is the main reason for the weaker quarter. The margin of $41/t in the met segment is the lowest we have seen in three years. Figure 6 - Source: Arch Quarterly Reports Arch reported an operating cash flow of $59M and a discretionary cash flow of only $12M during Q2, which was the weakest we have seen in a while. It is important to remember that Arch is a low-cost producer, so if the company is just barely making a profit here, we can expect to start seeing negative results elsewhere in the industry if current met coal prices persist as contract prices settle lower. Figure 7 - Source: Arch Quarterly Reports Arch is committed to returning 100% of its discretionary cash flow to shareholders. 25% of the distributions are in the form of dividends, while the remaining 75% will be in the form of buybacks. The next dividend payment in September will be $0.25 per share. The company bought back 94K shares during Q2 but also continues to have a net cash position of $146M which can be used if we see more weakness going forward. Valuation The below figure uses the latest share price, financials as of Q2 2024, and the company's latest 2024 guidance. Note that the thermal coal segment is in 2024 expected to have a very minimal positive contribution to EBITDA. Figure 8 - Source: My Estimates The historical free cash flow yield is presently around 13%, using both enterprise value and market cap in the denominator. If the current depressed coking coal prices persist for the rest of 2024, the 2024 free cash flow yield is likely to be around 10%. Conclusion & Risks It is important to remember that coal prices are cyclical and if current prices continue for any extended period, we are likely to start seeing supply curtailments. Also, at least I expect to see an improved margin from the thermal coal segment over time as well, which is not considered if we only focus on the 2024 numbers. Following the recent weakness in Arch, I view it as a very compelling buy here, and I have been adding to my holdings recently. The valuation is reasonably attractive using depressed coal price assumptions, the balance sheet is excellent, operating costs are in the lowest quartile for the met segment, and the company continues to distribute 100% of discretionary cash flow to shareholders. So, there is a lot to like apart from the recent price action. Can coking coal prices get even more depressed? Always, but given that Arch is a low-cost producer, I am not that concerned that the company will generate substantial losses for any extended period and the balance sheet is robust to handle any short-term losses. In 2024, Arch was added to the S&P SmallCap 600 index, which substantially increased its percentage of ownership coming from ETFs to now 39%. So, the company has quite possibly become more sensitive to market moves following that. There is also a potential risk of excessive selling if the company were to be dropped from any of the larger ETFs, where I am specifically thinking of Pacer US Small Cap Cash Cows 100 ETF (CALF) which invests in the top 100 companies in the S&P SmallCap 600 index based on free cash flow yield.    Figure 9 - Source: Koyfin","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2458785626"}