Can Arch Resources Survive The Covid-19 Recession?

by Trefis Team
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The stock price of Arch Resources (NYSE: ARCH), the second largest supplier of coal in the U.S., has declined by 54.0% since the beginning of the year. The consumption for coal has been on a decline for the past few years, as demand for a cleaner form of energy is on the rise. The demand for coal is also linked to natural gas prices, which have been favorable in the recent years. While a Covid-19 led recession will further impact the company’s revenues, cash flows, and ability to pay dividends, even before Covid-19, the industry was facing severe headwinds with half a dozen companies filing for bankruptcy in 2019. Note that 2019 also marked the year with the lowest demand for coal in over 40 years. While a bankruptcy doesn’t necessarily means a company going out of business, it can also include massive financial restructuring. Trefis analyzes the potential impact of the Covid-19 led recession on Arch Resources with a focus on the company’s liquidity reserves and concludes that Arch has a steady financial position and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On Arch Resources’ Revenues 

  • We consider a scenario of a recession that persists through late Q3/early Q4 2020 can reduce the company’s revenues by 35% from $2.3 billion in 2019 to $1.5 billion in 2020.
  • With restrictions on work force in place at several plants, including that for cement and metal plants that use coal,
    are operating at a lower capacity, thus impacting its demand. Also, there is less electricity consumption because offices are shuttered and factories are working at lower capacities.
  • The natural gas prices have also seen a steep decline of 25% year-to-date, resulting in lower demand for coal. In fact, U.S. Energy Information Administration estimates a 24.2% fall in the U.S. coal production and 22.8% decline in its consumption in 2020.

Impact On Arch Resources’ Cash Flows

  • Arch’s cash flows are likely to fall in 2020, due to a steep reduction in revenues and a hit to profitability. The company will have to operate at limited capacity in the current environment. Elevated fixed costs, coupled with lower revenues, will hurt the company’s bottom line.
  • However, Arch could take a number of measures to mitigate the impact on its cash balance, such as raising more capital, and deciding to substantially reduce expenses across all operating heads and capital expenditures. The company has already suspended dividends, and it is unlikely to make share repurchases in 2020.
  • Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $420 million in 2019 to around $118 million in 2020. Also, with expected capital expenditures of $133 million for the year, FCFO-CapEx will be $-15.4 million in 2020.

Cash Balance Impact

  • This will lead to a 2020 cash balance of $252 million, which is higher than compared to 2019.
  • This is with the assumption that the company will not pay dividends or re-purchase shares, and it will raise additional capital. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, Arch can weather a recession through Q2 2020 and a 35% decline in revenues by cutting capital expenditures, share repurchases, and suspending dividends. For an alternative scenario with a 20% change in revenue, see our full analysis of the impact of Covid recession on Arch Resources.

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

Lower coal production will also impact coal shipment for railroad companies, such as CSX Corporation.

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