ARCH - Arch Resources Performance Trending In Wrong Direction

2023-06-13 01:20:02 ET

Summary

• I no longer recommend Arch Resources due to the end of its tax loss carry forward, reducing future dividends, and cash flows.
• The stock price has dropped from $153 to $110, and financials for 2023 Q1 show a decline in net income and cash on hand compared to 2022.
• Investors are advised to avoid the stock until a clearer path forward is visible with respect to coal prices and operational challenges.

I no longer recommend Arch Resources ( ARCH ) after realization that their tax loss carry forward has ended which will reduce future dividends and cash flows.

Some positive factors I revealed in my February article are trending south, not the least of which is the price of coking coal. I outlined the risk of price variability:

The volatility in coal prices can swing in both directions and precise timing is impossible. $273 million in likely thermal coal 2023 profits has been achieved based on company guidance showing 68.2 million tons of coal contracted" (company 10-K - 2/16/23)

After reading through company filings and listening to the recent conference calls, I was a bit confused as to whether the company "locked" in minimum fixed price on some contracts. After sending repeated e-mails to company investor relations and placing three phone calls to various company leadership, without a response, I decided to sell my position and look for better investment options. I feel fortunate to have made my decision and escaped with a small profit.

The stock has dropped sharply from $153 to about $110 today. One other factor that I learned from reading up on competitor Alpha Metallurgical ( AMR ) was that state (I believe Wyoming) taxation on coal had been marginally increased. I also discovered that rail shipments from Powder River Basin were beyond "terrible" as Arch had properly warned. Alpha revealed only one train of thermal coal departed in the first quarter, a stunning situation which has persisted for over one year now.

Financials 2023 Q1 vs. 2022

Tax provision-$37 million vs $455,000 (2022 Q1)

Net Income-$198 million vs. $272 million

Cash on hand -$119 million vs. $319 million

Cash from operations-$126 million vs. $293 million

These trends are tracking in the wrong direction for me. Some declining figures are a result of timing related to receivables vs payables but the differentials are striking. The West Elk mine experienced significant geological issues which will hamper thermal coal deliveries for the foreseeable future. The company continues to believe their coking coal franchise remains a valuable business, but at this point, I recommend investors consider avoiding this stock until we see a clearer path forward.

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