Merger With CONSOL Energy Will Improve Efficiency And Expand Export Capabilities In Metallurgical Coal

Key Takeaways

• Transformational merger and operational shifts are set to improve profitability and enhance net margins.
  
• Strategic investments and favorable market dynamics are expected to drive revenue growth and strengthen earnings.
  
• Challenging conditions and legacy contracts pose risks to margins and revenue, while merger execution and market dynamics could impact future financial performance.

Catalysts

Engages in the production and sale of metallurgical products.

• The transformational merger with CONSOL Energy is expected to create significant synergies and cost savings of $110 million to $140 million annually, driving improved profitability and free cash flow. This is likely to positively impact net margins and earnings.
  
• The transition of the mining operations at Leer and Leer South to more favorable reserve areas is expected to increase production efficiency and lower operating costs well into 2025, which should enhance net margins and profitability.
  
• The expiration of low-priced legacy contracts at the West Elk mine and their replacement with higher-value contracts is expected to substantially increase revenue and improve net margins in the seaborne thermal market.
  
• Increasing investment in expanding logistics and export capabilities, including ownership in East Coast terminals, will enhance revenue streams and open up new growth markets, particularly for high-value metallurgical coal.
  
• Anticipated improvements in global coking coal market dynamics could result in better pricing and demand, driving higher revenues and stronger earnings performance, especially as global supply remains constrained.

Arch Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arch Resources's revenue will decrease by -2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 18.0% in 3 years time.
• Analysts expect earnings to reach $443.6 million (and earnings per share of $29.16) by about December 2027, up from $179.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.9x on those 2027 earnings, down from 15.6x today. This future PE is lower than the current PE for the US Metals and Mining industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 5.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Arch Resources Future Earnings Per Share Growth

Risks

• The company is currently experiencing challenging geological conditions, which have led to throttled back production volumes and higher operating costs, potentially impacting their net margins.
  
• Legacy contracts with lower realizations have dampened results, with a significant portion of these contracts expiring at the end of this year, causing potential risks to revenue if not adequately replaced with more profitable agreements.
  
• The pending merger with CONSOL Energy introduces execution risks, especially in terms of securing stockholder approvals and integrating operations, which could affect overall financial performance and synergy realization.
  
• Global coking coal markets are currently seeing softer pricing due to oversupply conditions, which could pressure margins if demand does not increase as anticipated.
  
• The company faces potential risks in thermal coal markets due to uncertain domestic demand and reliance on seaborne thermal markets, which could affect future revenue streams if market dynamics do not align as expected.

Valuation

• The analysts have a consensus price target of $165.0 for Arch Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $185.0, and the most bearish reporting a price target of just $140.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.5 billion, earnings will come to $443.6 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of $154.67, the analyst's price target of $165.0 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.