Damian Pawlos/iStock via Getty Images Investment Thesis
Arch Resources ( ARCH ) is going to benefit from a multitude of factors coming together that will culminate in Arch Resource’s free cash flow this year soaring to somewhere around $560 million to around $900 million.
This implies that the stock is priced at around 3x this year’s free cash flow. What’s more, its balance sheet is now strong and allows Arch Resources to ramp up its capital return program.
All considered I believe that this investment may offer investors a compelling risk-reward profile. Please be sure to check out Kingdom Capital’s article on this stock. It’s a very good article . Investor Sentiment Wakes Up
Data by YCharts Arch has seen its share price pick up slightly in the past several weeks. However, I make the argument that this is only the start of a strong and sustained appreciation in its share price. Revenue Growth Rates Like to Remain Strong
Arch Resources revenue growth rates Arch Resources is a cyclical commodity company. During 2020 its revenue growth rates were meaningfully negative, while in 2021 Arch resources was able to turn around its operations and report very compelling growth rates.
However, I believe that’s there are a few reasons to believe that Arch Resources is going to see its revenue growth rates remain high for a while: Arch Resources revenue consensus estimates As you can see above, revenue growth rates are expected to report triple digits growth rates for H1 2022. However, I believe this could actually prove a very conservative estimate by analysts. Why Arch Resources? Why now?
Arch Resources sells metallurgical coals to global steel markets. With the steel market being notably hot right now, as there’s a massive amount of pent-up demand and meaningful inventory shortages, the price of steel is going up fast.
What’s more, steel shortages are being further intensified as between Russia and Ukraine, the two countries contribute approximately 14% of the global steel production. Therefore, the disruption facing these two countries has led to an increase in steel prices.
Consequently, given that there are high prices for steel, this has impacted the demand for coal for steel mills and industrial facilities. Thus, Arch Resources has sought to capitalize on this by increasing the price of metallurgical coal. Arch Resources BMO conference As you can see above, the average price of coal has been under $200 per metric ton during 2021.
Then, more recently, in the past several days, there’s been a spike in coal prices, with the price jumping more than 30% over a week. Twitter #coal All this together implies that Arch Resource’s coal sales are going to dramatically increase. Meanwhile, given that its operating costs are mostly fixed, this will lead to its bottom line profitability meaningfully increasing. Profit Margins Will Improve
Arch Resources BMO conference As you can see above, putting asides the Covid year, Arch Resources has typically made around $400 to $500 million of EBITDA.
However, as you know, the business is very capital intensive, requiring a large amount of capex. For 2021, capex requirements were approximately $245 million, a slight drop from the prior year.
This meant that its free cash flow generation was essentially breakeven for 2021. That being said, Arch Resources did manage its expenses well and finished Q4 2021 on a high note, with its balance sheet close to a net neutral position. Arch Resources BMO conference Consequently, given its strong balance sheet and expected positive outlook, management is looking to ramp its capital return to shareholders. Going forward during 2022, Arch Resources will deploy approximately 50% of its free cash flow towards dividends and the other 50% towards repurchases and special dividends. ARCH Stock Valuation — Cheap Enough
The biggest driver of Arch Resources’ bottom-line profitability is the price of metallurgical coal. However long it takes for supply to catch with demand, that would have a dramatic implication on how long Arch Resource’s bottom line profitability would continue to impress investors.
The situation in Europe has caused a spike in energy costs, with Europeans having to figure out a way to get their energy bills under control with the use of thermal coal.
On the other hand, if the sanctions against Russia were to be lifted soon, this would lead to oil prices rapidly stabilizing and coming down, which would have a knock-on effect on bringing the price of coal down.
Here are some very conservative back-of-the-envelope assumptions. We know that during Q4 2021, cash flows from operations were $140 million. But this was during […]
source Arch Resources: Positioned To Benefit From Energy Crisis
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