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Coal’s post-pandemic fate wasn’t supposed to be so rosy, it really wasn’t. The clear conclusion then was that the world was moving away from the dirtiest fossil fuel. Indeed, coal was a low-hanging fruit for policy makers around the world looking to decarbonize their power grid with a number of countries completely removing the fuel that once powered all of their energy needs in the distant past.

Arch Resources (NYSE:ARCH) along with Peabody Energy (BTU) formed some of the last long-declining American coal redoubts. With their future seemingly on a contained decline, the surge came as a shock and surprise to bulls and bears alike. Arch Resources has seen its stock price rise 81% in the past year as coal prices hit generational highs following Russia’s invasion of Ukraine. Europe, long dependent on Russian gas pipelines for its energy needs, now finds itself facing an existential threat. Russia has shut down the Nord Stream 1 gas pipeline, militarizing its gas supplies to the continent. This desperate response to the flood of EU sanctions was implemented just after the entry into force of a ban on the import of Russian coal under the Fifth EU sanctions package. Representing 7% of the global market, this was a significant volume of coal that must now come from alternative sources.

Coal price 5 years

Looking for Alpha

The impact has been a sustained rise in the price of the commodity, proving a generational boom for Arch and its longtime shareholders. The global macro picture for the commodity is now rosy in a way that totally defies the previously held consensus on the death of coal.

Coal accounts for 70% of electricity production in India. The country was previously able to meet most of its demand internally, but had to accelerating imports in recent months. Germany, Europe’s largest economy, shut down its nuclear power plants and increased the share of coal in its electricity production. China also plans to add 270 GW of coal-fired thermal capacity in the next five years to 2025, more than previous estimates of 100-200 GW.

Sources of electricity in Germany

Bloomberg

Revenue hits new records as cash flow increases

Arch last reported earnings for its second quarter of fiscal 2022, which saw revenue of $1.13 billion, up 151% year-over-year and a $119.82 million beat on consensus estimates. Revenues were strong and reached a record high in the quarter.

Chart
ARCH revenue (quarterly) given by Y-Charts

Net income also increased to $407.56 million with operating cash flow of $268.23 million. This strong cash generation means cash and cash equivalents of $282 million increased 51% from the prior year quarter, but decreased on a sequential basis as the company prioritizes repayment of the debt. Long-term debt has now shrunk from $522.6 million five quarters ago to $127.1 million in the last quarter of reported results.

The company also announced a quarterly dividend of $118.7 million, or $6 per share. Total dividends declared for the first half now stand at over 10% yield. With strong cash flow expected to continue, the company’s common stockholders are considering the continuation of this outsized, covered payout.

A defiant resurgence as the New Energy Zeitgeist takes hold

The environmental costs of coal are well covered and known. This has been the main reason for its phasing out in some countries around the world.

What are the safest and cleanest sources of energy?  - Our world in data

Our world in data

However, this has clearly not been a strong enough argument to dissuade countries like Germany from continuing to aggressively pursue the raw material instead of nuclear power.

The last 12 months have completely changed the short, medium and long term outlook for coal. While the current high prices appear unsustainable, with demand destruction still being realized in a number of countries that have shut them down, this has clearly not been as relevant as the bears expect. Several political decisions have meant that stories of the death of coal have been greatly exaggerated.

The current scenario can truly only be described as a financial miracle, as a company once on the brink of bankruptcy with stocks shunned by what was the growing ESG movement, has now staged a comeback like no other. Arch is poised to print money at a level it has never seen in its near history, rewarding long-beleaguered shareholders who have weathered the lows. With the new energy zeitgeist fully defined as a visceral need for energy security in the face of Russia’s gas supply shutdown, coal is expected to see increased demand from European countries that have extended life of their coal-fired power plants or are shutting down nuclear power. Therefore, Arch’s challenge to his death continues apace.

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