ST. LOUIS - Arch Coal Inc., one of the world's biggest coal producers, reports earnings for the third quarter before the market opens Friday. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: Shares of major coal mining companies have been under pressure in recent months as investors worry about the slumping steel industry and the recession's effect on some 2010 contract negotiations.

Starting with St. Louis-based Peabody Energy's earnings release last week, analysts have been closely watching the third-quarter performances of coal-mining interests as a gauge of the strength of the rebounding manufacturing economy. Observers specifically were keeping an eye on sales of metallurgical coal used to make coke, a key ingredient in steelmaking.

Though metallurgical coal is produced in smaller quantities than steam coal for utilities, it sells for more than double the price, often boosting profits.

Peabody and Tampa, Fla.-based Walter Energy last week reported stronger-than-expected profits for the third quarter, in large part due to metallurgical coal demand.

In July, Arch said its second-quarter earnings slumped to a loss much larger than Wall Street expected, citing a 20 percent drop in sales and production cutbacks. But Arch executives said markets - weighed down by huge stockpiles of coal and soft prices for natural gas - were bottoming out and poised for a rebound.

"Unfortunately coal has suffered the full brunt of this economic recession," Steve Leer, Arch's chairman and CEO, told analysts then. But "looking ahead, we're beginning to see signs of life in the economy and expect industry fundamentals and our performance to improve as we progress through the remainder of the year."

Arch said then that it again was shaving its 2009 sales volume to between 114 million and 118 million tons, excluding coal purchased from third parties. In April, Arch said it was slashing its U.S. production this year by an additional 4 million to 7 million tons, down from the 120 million to 127 million tons the company had forecast in January.

On Oct. 16, the U.S. Environmental Protection Agency said it planned to use its authority for the first time to revoke a previously issued permit for an Arch-owned surface mine in West Virginia, citing "our very serious concerns" the project could violate the Clean Water Act. The permit, issued in 2007, would allow the company to fill valleys at the site with material removed to expose coal, a practice widely opposed by environmentalists.

Arch said it was "shocked" by the action against the permit it called "the most carefully scrutinized and fully considered" in West Virginia's history," taking almost 10 years.

During the third quarter, Arch said it completed a $764 million purchase of a Wyoming coal mine from Rio Tinto Ltd., expanding Arch's foothold in Wyoming's Powder River Basin - what Arch described as the largest, fastest-growing and most cost-competitive coal supply region in the United States. The Jacobs Ranch mine last year produced 42.1 million tons of sub-bituminous coal for sale to U.S. power generators.

Arch fuels about 6 percent of all U.S. electrical generation.

BY THE NUMBERS: Analysts polled by Thomson Reuters expect, on average, earnings per share of 4 cents and revenue of $605 million. In the year-earlier period, Arch had net income of $97.8 million, or 68 cents per share, on revenue of $769.5 million.

ANALYST TAKE: Daniel Scott, an analyst with Dahlman Rose & Co., on Oct. 14 downgraded Peabody, Arch Coal Inc. and James River coal to "hold" from "buy," saying the weak outlook for thermal coal - the kind used for heating and generating electricity - does not support current valuations.

Last month, Macquarie Research analyst Curt Woodworth downgraded the coal industry sector to "neutral" from "overweight," predicting China's demand has diminished as it has built an excess inventory of steel. Woodworth lowered the rating on Peabody to "underperform" from "outperform" and the target share price to $35 from $44, citing a negative impact from China's slowing demand for metallurgical coal - used in steelmaking - and worsening conditions for thermal coal.

WHAT'S AHEAD: Analysts will watch earnings reports for guidance about contracts for next year and 2011 - and the prospects of any additional production pullbacks. Analysts also are watching how government energy policy under the Obama administration could affect the coal industry.

STOCK PERFORMANCE: Arch shares rose 45 percent to $22.13 during the third quarter. Over the first nine months of 2009, shares were up 19.6 percent.

A service of YellowBrix, Inc.