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Hold Arch Coal (ACI) Shares At Current Levels: Brean Capital

 February 06, 2013 02:49 PM

(By Balaseshan) Brean Capital analyst Lucas Pipes continues to recommend investors hold shares of Arch Coal Inc. (NYSE: ACI) at current levels, following the coal producer's downbeat fourth quarter results.

The brokerage, which maintained its "Hold" rating on ACI, widened its 2013 loss per share estimate to $1.29 from $0.78 and its 2014 loss estimate to $0.74 from $0.30, due to Arch Coal's relatively weak Powder River Basin (PRB) and met coal pricing in 2013.

On Tuesday, Arch Coal announced a Q4 miss, with adjusted loss per share of $0.42 versus the Street's loss estimate of $0.15, the analyst noted. Adjusted EBITDA excluding unusual items was $130 million versus the Street at $143 million. The biggest operational driver of the miss was the company's PRB segment.

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Notably, the company issued 2013 volume guidance that indicated higher met coal sales but lower thermal coal sales year-over-year, Pipes noted. This was largely due to the opening of the Leer mine in the second half of 2013 as well as continued weakness in the domestic thermal coal market.

The analyst said Arch went on to guide to roughly flat costs in 2013, though newly priced tons garnered the greatest attention. Met coal contracts were settled for 2013 at an average price of $91/ton while newly priced PRB volumes were settled at about $10/ton.

The company stated that the former price was due to a greater proportion of lower quality met coal in the mix, while the latter was restrained by market forces, though margins remained slightly positive, even at such depressed pricing, Pipes noted.

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In the analyst's opinion, investors would have appreciated more production discipline as long as domestic inventories remain highly elevated. He believes the company remains fully valued at current levels.

The analyst said the Leer mine was estimated to produce and sell roughly 1 million tons in 2013, and had already sent out coal for testing, with 70% of the samples sent to Asia. Altogether, the company provided a relatively timid outlook on both volumes and costs, while the company's pricing was an especially contentious point.

ACI is trading up 0.50% at $6.07 on Wednesday.



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