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Arch focuses on met coal at Appalachian mines

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Utilities are burning down their stockpiles and will need to replenish them. The export market for metallurgical coal remains uncertain, but a new mine came on line in December.

That's the good news for Arch Coal, one of the largest producers in West Virginia.

The bad news: The rebound could very well benefit regions other than West Virginia.

One Arch Coal official told investment analysts on Feb. 4 that it will be difficult for coal from Central Appalachia (CAPP), which includes southern West Virginia and eastern Kentucky, to compete with natural gas despite the rise in gas prices. Even as the coal market improves, Arch officials expect lower CAPP production this year.

Arch released its fourth-quarter and year-end financial statement before markets opened Feb. 4. The company reported a net loss of $371.2 million in the fourth quarter and $229.2 million for 2013.

When talking with analysts later in the day, Arch's senior managers were bullish on thermal coal from the Powder River Basin and on metallurgical coal from Appalachia, but they were bearish on thermal coal from Appalachia.

Arch also expects natural gas prices to fall this year, lessening CAPP coal's appeal in the utility market, Eaves said.

"So, we continue to see pressure on Central Appalachian thermal coal as we move forward," he said.

Stockpiles at power plants supplied by CAPP coal remain high, but those at plants supplied by Powder River Basin coal are falling to the point that the market for PRB coal should be good this year, Arch executives said.

While Arch is pessimistic about CAPP thermal coal, it is looking forward to production from its Appalachian mines that produce met coal, particularly the new Leer mine in Taylor County.

"The longwall began operating in December, and we are pleased with the ramp-up thus far," Eaves said. "We have invested over $400 million to bring on this mine, which will be the cornerstone of Arch's met coal output for years to come.

"In 2014, we expect the Leer mine to run at a three million ton-a-year pace annualized with roughly 70 percent of that output targeted for the coking coal market. About half of those tons are already committed in the market today."

Arch can produce about 10 million tons of met coal per year, but it will aim for only 8 million tons this year because of market conditions, Eaves said.

"We currently anticipate a challenging environment for the bulk of 2014," he said. "One promising sign is that demand remains reasonably strong. Unfortunately, global supplies outplace that demand, depressing prices.

"Longer term, we do see a bright future for U.S. coal in the international market, but we expect lower metallurgical export volumes in 2014," he said.

Paul A. Lang, Arch's executive vice president and chief operating officer, said the company reduced its cash cost in Appalachia by 4 percent last year while cutting volumes by 20 percent.

"We have been actively realigning our portfolio in the region to concentrate production on our lowest-cost mines and to shift our outputs toward higher-margin metallurgical markets," he said.

Met coal made up about half the tons Arch sold from its Appalachian mines last year. That was up from 2012, and Arch expects met tonnage to be a greater percentage this year, Lang said.