Arch Resources

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Arch Resources is a leading U.S. coal producer, focusing on metallurgical and thermal coal, with operations in major basins.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Arch Resources (ARCH) is primarily a metallurgical and thermal coal producer. This means that while both are “coal,” the end-markets for each type are vastly different. Metallurgical coal is used for steelmaking, while thermal coal is used primarily for electricity generation.

Business Overview

Arch Resources (ARCH) operates several mines across different regions of the United States, including: Metallurgical Coal in Appalachia, Thermal Coal in Powder River Basin and Illinois Basin. These areas feature different operating environments, cost structures, transportation dynamics and end markets. The company uses both surface and underground mining methods.
The company’s revenue streams are diversified across both metallurgical and thermal coal, however, the exposure to each can vary widely according to prices and demand. * Metallurgical Coal: Primarily utilized in steelmaking process, has a more volatile pricing cycle, largely following the demand for steel production globally. This segment generally has higher margins, however there are also more risks involved. * Thermal Coal: Used in electricity generation, is more predictable in prices and demand, though tends to have lower margins. There’s also a risk of declining demand due to the energy transition.
The geographical breakdown of revenues, although not specifically broken down in the reports or earnings calls, is roughly North America, and a smaller portion from international sales, mainly for metallurgical coal.

Trends in the Industry:

  • The coal industry is in a state of flux due to several factors.
  • Metallurgical Coal: Despite an expected global demand growth in steel over the long term, met coal still faces volatility depending on the economic cycle. New high-quality met coal supply, however, is limited.
  • Thermal Coal: Is facing declining long term demand due to environmental concerns and the transition towards renewable energy, however, short-term demand could remain robust depending on global prices. * Coal prices have been volatile due to supply-chain disruptions, economic conditions and government policies. * Environmental regulations, particularly around emissions and water-use management, continue to be more stringent, increasing operating costs. * A move toward renewable energy sources will impact long-term demand for thermal coal. * Increased attention to the environmental, social, and governance (ESG) factors also will impact investment in the sector.

Despite the environmental concerns and shift towards renewable energy sources, it would be unwise to assume the complete disappearance of coal. As mentioned, met coal is still needed for steel production and certain regions still rely heavily on coal for power generation, creating a complex situation of diminishing, but not eliminated, demand.

Competitive Landscape:

  • The coal market is intensely competitive. Companies vary greatly by mining techniques, locations, production costs and asset quality. * Arch Resources faces competition from other major U.S. coal producers, such as Peabody Energy and Contura Energy and international players with low costs. * Several of Arch’s competitors are vertically integrated and can produce more efficiently than Arch.
  • Competitive intensity varies widely based on specific coal basins, and they have different advantages and weaknesses.
  • Some players also have unique resources, locations, or expertise that provide a competitive advantage.

Though it’s a very competitive industry and hard to achieve and sustain a moat. The location of a company, access to resources, and the quality of its assets are very important.

What Makes Arch Resources Different: * High-quality metallurgical coal: Arch is a large producer of high-quality metallurgical coal, which sells at a premium. * Low-cost operations: Arch operates some of the lowest-cost mines, particularly in the Powder River Basin, giving the company a cost advantage. * Geographic diversification: The company’s mines span across different geographies, which allows it to be less vulnerable to localized events or trends. * A shift to more met coal production, which is more lucrative but volatile.

Financial Analysis

Arch’s finances can be somewhat difficult to analyze since it has periods of high profitability followed by significant loss-making quarters.

Margins: * Arch’s revenue and profits are highly sensitive to changes in coal prices, since most of their contracts are on short term basis. * The company’s margins are also significantly affected by logistics costs. * Since Arch is transitioning from thermal to met coal, the company’s margin structure can change, as met coal generally has better margins than thermal coal.

  • In the most recent quarters, Arch has seen an impressive increase in its margins, due to higher coal prices (especially met coal prices) and its operations efficiencies.

Margins are volatile and depend on prices, thus are very difficult to model and project accurately.

Debt and Capital Structure:

  • The company’s debt is relatively high, which creates an increased level of financial risk.
  • However, management has expressed its intentions to pay off debt as much as possible.
  • The company’s target debt-to-equity ratio is at around 0.3, which will increase financial stability. * However, their ability to grow and capitalize on opportunities is limited due to the debt burden. * The company’s cash balances are stable, but management is focused on debt reduction.

Cash Flow:

  • Cash flows fluctuate widely, depending on the demand and price of coal.
  • The company’s capital expenditures are relatively low, since no new major mine developments are planned.
  • The company is increasingly returning capital to shareholders through share repurchases and dividends, which indicates confidence in its cash generation capabilities.

As the company generates massive profits when prices are high, its share buybacks and dividends can lead to great returns for the shareholders. But this may also result in them having less money in the future when prices may fall. They have less flexibility to adapt to a downturn when they are returning most of the profit to the shareholders.

Recent Concerns/Controversies/Problems:

  • The management has been criticized for a strategy of maximizing short-term profits at the expense of long-term growth, mainly due to a transition to thermal coal and then to met coal.
  • The volatile energy market and concerns about long-term demand may affect the company’s performance.
  • Management has also faced labor challenges.
    • Management is focusing on increasing profitability through operational efficiencies and by shifting its production toward more lucrative met coal.

Moat Analysis

Based on our analysis, I would give Arch a moat rating of 3/5. Here’s a more detailed justification:

Factors Supporting a Moat:

  • Economies of Scale: Arch, being one of the largest coal producers in the US, benefits from economies of scale. However, many other larger players exist as well, which reduces this a bit.
  • Access to Resources: Through ownership of mines in many regions, Arch has a level of access to the resources which gives them a competitive advantage. This is also a type of geographical advantage, reducing transportation costs to customers.
  • Pricing Power: Met coal has been sold at high prices, and Arch can potentially achieve greater profit margins.

Factors Weakening the Moat:

  • Commoditized Industry: Coal is inherently a commodity product, and price is a major component in purchase decisions, meaning companies have less pricing power.
  • Limited Differentiation: It is difficult for coal companies to meaningfully differentiate themselves, since the end-product is the same. * Intense Competition: The coal industry is very competitive and many new entrants can enter the space when prices are high. * Low Switching Costs: Buyers of coal can switch to another producer easily without a cost or friction. * Regulatory Risks: Environmental restrictions and regulations can add to costs and are a large risk, especially in regards to long-term use of thermal coal.

Although the company benefits from its size and has low costs in certain areas, ultimately, they have no way to set prices, and its main source of profitability depends on market fluctuations.

Risks to the Moat and Business Resilience:

  • Long-term decline in thermal coal demand: The transition toward renewables poses a clear threat to demand, and long term use of thermal coal will likely decline rapidly. * Volatility in Metallurgical Coal Demand: Prices and demand for met coal are very cyclical and sensitive to the economy, posing a risk for the business.
  • Environmental regulations: Stringent regulations and environmental compliance can increase costs and limit the company’s flexibility.
  • Increased competition from low cost producers Competition from cheap, low-quality coal suppliers can lower profits. * Adverse changes in transportation logistics: Since freight is a big factor in coal operations, supply-chain disruptions and transportation difficulties can negatively affect costs and profits.
  • Management decisions: Poor allocation of capital, overpaying for acquisitions, and ineffective planning may damage the company’s growth prospects and ability to create value.
  • Financial Risks: If the company is unable to pay down debt or over-leverages itself, a downturn might result in bankruptcy.

Business Resilience:

  • Arch’s production in different regions allows for some operational and financial resilience.
  • The shift to met coal will lead to more profitability and stronger earnings in the coming years. * Management has shown commitment to cost control and operational efficiencies.
  • The company has significant cash reserves.

Though, the financial risk of the company is still very high. And if the business faces long-term disruptions in the coal industry, then those cash reserves would likely be used up, creating very high risks for the shareholders.

Understandability: 2 / 5

  • Understanding Arch’s core business of producing coal is relatively straightforward. However, there are a lot of complexities.
  • The various nuances of thermal and metallurgical coal markets, transportation dynamics, and regulations can make it challenging for someone with no prior experience.
  • Interpreting management decisions, financial performance, and future prospects are not very simple.

Balance Sheet Health: 4 / 5

  • Arch has a decent cash position and low debt to equity as of 2023.
  • However, the history of high debt and volatile cash flow is concerning.
    • Management has a stated goal of paying down debt, which provides a sign of good financial health.
  • Overall balance sheet can be said to be healthy, while still containing some risks due to past debt management practices.


In Conclusion, Arch is a business that operates in a complex and cyclical industry. Though it has some strengths and competitive advantages, it is also prone to many threats that can affect its long-term outlook.