Coal stocks continue to remain under pressure this year. Falling coal prices and uncertainty about the world economy and coal demand has pushed coal stocks down. President Obama’s plan to limit coal-fired plants adds more pressure to the industry.
When the situation got dire, coal companies started to implement their cost-cutting plans. Their strategy was to limit their expenses and wait until the storm passes. However, the storm seems to be at full throttle and coal prices show no hint of going up. Now, coal companies have started to explore the next possibility – the sale of assets.
Arch Coal Inc (NYSE:ACI) sold its Utah operations to Bowie Resources for $435 million in cash. Arch Coal had $730 million in cash and $248 million in short-term investments at the end of the first quarter. With the addition of fresh cash, Arch Coal could potentially have more than $1.2 billion of immediate liquidity. Why is this important?
Arch Coal Inc (NYSE:ACI) is losing money quarter after quarter. The company is projected to lose money this year and the next year. The company has two sources of loss. It is losing money from operations and losing money from interest expense. In the first quarter, the loss from operations was $32.4 million, while the loss from interest expense was $92.2 million.
By making this sale, Arch Coal Inc (NYSE:ACI) effectively narrows its loss from operations and boosts cash.
Debt is the most important problem for coal companies. Arch Coal Inc (NYSE:ACI) has $5.1 billion of long-term debt. The first portion of this debt, worth $600 million, matures in 2016. The company still has time to get things right before the time to pay the bills would come. It’s highly unlikely that Arch Coal would be able to refinance its debt. Walter Energy, Inc. (NYSE:WLT), the met coal producer, recently explored options to refinance its debt. In less than two weeks after the initial announcement, the company has stated that it does not plan to do the refinancing. The rates were unacceptable.
Standard & Poor’s has recently lowered its rating on Arch Coal Inc (NYSE:ACI)’s senior secured bank debt to ‘BB-‘ from ‘BB’. If we look at the rates for already issued securities, we can assume that the company would not be able to issue more debt on comfortable terms. Seniors notes due 2016 yielded 8.75%, while senior notes due 2019 yielded 9.875%.
This situation is common among peers. Peabody Energy Corporation (NYSE:BTU) has $6 billion of long-term debt. The company had $630 million in cash at the end of the first quarter. The company had operating profit of $88.8 million, which was offset by interest expense of $101.3 million. Peabody has better terms on its securities. For example, senior notes due 2016 yielded 7.375%. While Peabody is in a relatively better position, its stock is down 44% while Arch Coal Inc (NYSE:ACI) is down 49%.