Loss-making Arch Resources pivots to steel and coking coal
Arch Resources, the second largest coal company in the US, has reported a Q3 loss of £146.8 million, compared with a net income of £81.6 million in the year-earlier period, with revenues dropping from £473.7 million to £292.3 million.
In its statement, Arch reported its quarterly results include a non-cash impairment charge of £124.7 million associated with the write-down of assets at several of its legacy thermal operations.
Coal has lost market share as utilities have shut down coal-fired facilities and switched to generating electricity from natural gas or renewable energy sources, a MarketWatch report adds.
"In keeping with our rapid pivot towards steel and coking coal markets, we are driving forward with a plan to optimise the value of our legacy thermal assets," says Paul A Lang, Chief Executive Officer of Arch Resources.
"We have launched an accelerated effort to evaluate strategic alternatives for our thermal operations, including possible divestiture. Simultaneously, we are finalising plans to shrink the operational footprint at these operations, with a particular emphasis on our Powder River Basin assets, where we are sharply focused on systematically reducing our asset retirement and related mine closure obligations."
The strategic shift follows the company's announcement at the end of September that it will terminate its proposed thermal asset joint venture with Peabody after the U.S. District Court blocked the transaction.
Arch's Powder River Basin mines, which produced nearly 75 million tons in 2019, are expected to produce less than 55 million tons in 2020. Arch is pursuing a plan that could reduce production levels by an additional 50 percent over the next two to three years.
Lang explains that this systematic winding down of Arch’s thermal operations is being carried out in a way that allows the company to continue to harvest cash and fund long-term closure costs with ongoing operating cash flows.
"Just as importantly, we believe that a careful and well-communicated exit strategy is the most responsible way forward for a range of essential stakeholders, including our employees, the communities in which we operate, our longstanding customer base, and the many consumers who continue to rely on coal-based electricity,” he adds.
"We are very proud of the accomplishments and contributions of our thermal operations, which have managed exceptionally well over the last decade in a declining demand environment. We expect that exceptional execution to continue as we adjust the footprint of these assets and continue to address the realities of the marketplace."
The company is looking to refocus on metallurgical coal, which is used in steelmaking. During the quarter, Arch’s core metallurgical segment continued to exhibit tight, disciplined cost control while ramping up shipping volumes in response to a gradually improving market environment.
Metallurgical markets remain in the early stages of recovery. After reaching a recent low of £81 per metric ton in August, High-Vol A pricing assessments have rebounded around 10 percent in recent weeks. Supporting this improvement, global steel prices have jumped more than 30 percent from recent trough levels in all major regions, and steel producers continue to resume operations gradually and selectively at blast furnaces idled earlier in 2020.
In North America, 18 of 27 blast furnaces are now operating – versus just 12 at the low point – and European steelmakers have restarted nearly half of the 25 million tons of capacity that they idled earlier in the year. Asia and South America are following a similar recovery trajectory. In China, steel production is significantly outpacing 2019 levels. Steel mill utilisation rates are slowly but steadily marching higher as well, with US mills operating at nearly 70 percent this past week, versus a recent low of 51 percent in the spring.
Meanwhile, still-depressed pricing levels continue to pressure global coking coal supply, with production trending down in most major producing regions.
Arch believes that the rationalisation of high-cost supply – coupled with the ongoing recovery in global demand – could return the market to relative balance in the near term. Several of Arch's major customers have approached the company about accelerating shipments in recent weeks, and inquiries concerning new business are picking up as well.
During the quarter, Arch secured commitments totalling 1.7 million tons for delivery to North American customers in 2021, at an average fixed price of more than £68.78 per ton. Of that total, 1.3 million tons were High-Vol A quality that garnered more than £71 per ton.
"As we have stated in the past, we believe there is good, strategic rationale for maintaining a solid presence in the North American marketplace, but only at the right price," Drexler says.
"Despite the challenging market environment, we were able to lock in commitments for more than 20 percent of our projected 2021 output, at fixed pricing well above the assessed marks."
DRC selects Fortescue to develop giant hydro project
Democratic Republic of Congo's (DRC's) government said on Tuesday Fortescue Metals Group would develop the Grand Inga hydroelectric power project, including a 4,800-megawatt dam that has already been committed to Chinese and Spanish developers.
Fortescue to develop dams for world's largest hydroelectric project
Australia's Fortescue confirmed it was in talks with Congo to develop a series of dams that could become the world's largest hydroelectric project, but it said no formal binding agreement had been concluded.
Fortescue's involvement is the latest twist in Congo's decades-long quest to expand Inga, whose two existing dams - completed in 1972 and 1982 - have a combined installed capacity of nearly 1,800 MW.
The proposed expansion of six more dams would bring capacity to over 40,000 MW, roughly double the size of China's Three Gorges dam, currently the world's largest. Total development costs have been estimated at up to $80bn.
In 2018, a Chinese consortium that includes China Three Gorges Corporation and a Spanish consortium that includes AEE Power signed a deal with Congo's government to develop the third dam, known as Inga 3.
Ground has yet to be broken on Inga 3 because of questions over its financial viability. Alexy Kayembe De Bampende, President Felix Tshisekedi's top infrastructure advisor, said the project would now be led by Fortescue.
"Fortescue will be the sole operator for the entire Grand Inga (3 to 8). Chinese & co are welcome to join Fortescue," he told Reuters."There has been discussion between Chinese (Three Gorges) & AEE and (Fortescue) since last year to work together."
Three Gorges and AEE Power did not respond immediately to requests for comment.
DRC's Grand Inga green energy project will create hundreds of thousands of jobs
In a memorandum of understanding signed between Fortescue and Congo in September 2020, Fortescue "acknowledges the existing potential rights held on Inga 3 by third parties".
"In the event that, for any reason, such rights to develop Inga 3 become available, the government of the DRC undertakes to secure for Fortescue Future Industries an exclusive first option to develop Inga 3," it said.
A senior official at the government's Agency for the Development and Promotion of Grand Inga (ADPI), speaking on condition of anonymity, said the ADPI had not been involved in the talks with Fortescue.
Fortescue chairman Andrew Forrest met Congo President Felix Tshisekedi on Sunday to discuss the project. Forrest said Fortescue would use the energy from Inga to produce hydrogen to export around the world.
"The capital cost of this will be many many tens of billions of dollars and direct and indirect employment will be in the hundreds of thousands," he told reporters.
Fortescue has said it plans to fund the majority of its green energy projects off its balance sheet, investing about $1bn a year of its own money.
Fortescue's statement was made in response to an article in the Australian Financial Review.
Meanwhile, Fortescue has teamed up with Hatch, Anglo American and BHP, to form a Green Hydrogen Consortium focused on ways of using green hydrogen to accelerate decarbonisation within their operations globally.