Coal Stocks Key Off Arch Report (ACI, FCL, BTU, CNX)

This morning we saw Arch Coal (NYSE:ACI) report a tripling of earnings for the second quarter, $113 million compared with $37.6 million for the same period a year ago. The company reported EPS of $0.78, also up three-fold from $0.26 EPS last year. The stock was up more than 3% in pre-open trading and is up 9% mid-day. Arch’s report is also boosting Foundation Coal (NYSE:FCL) by about 8% and Peabody (NYSE:BTU) by more than 2.5%. Last week, Foundation posted a loss of $4.4 million for the second quarter, and Peabody posted a 143% gain in earnings. CONSOL Energy inc. (NYSE:CNX), which is scheduled to report next week, is up almost 5% in early trading.

Arch, which gets about 72% of its production from Wyoming’s PowderRiver Basin, could have done even better had it not had to cope withweather-related problems in moving its coal across the flooded Midwest.Both Foundation and Peabody experienced the same problems.

The big problem for every producer is operating costs. Peabody’s USoperating costs were nearly $3/ton higher in the second quarter a yearago. Foundation didn’t break out its costs per ton, but it’s total costof sales increased from $288.1 million in the second quarter of 2007 to$328.9 million this year. For the first six months of 2008,Foundation’s cost of sales are $72 million higher than a year ago.Arch’s operating cost per ton for the 2008 second quarter was $10.44,more than $1.00/ton more than a year ago.

According to Arch, the increase in operating costs were due to "reducedvolumes as well as higher commodity-related and sales-sensitive costs."In other words, energy costs to run the operation are starting to hurtus. Higher fuel costs affect coal producers just as they affectcommuters. And the depressed pricing of Powder River Basin coal isrelated to the distance that the coal has to travel to market. The morefuel needed to transport the coal, the bigger bite out of margins.

Paul Ausick
July 25, 2008