Bonds of Arch Coal Inc. (ACI:US) dropped after JPMorgan Chase & Co. (JPM:US) analysts lowered their recommendation on the miner’s debt to neutral from overweight, as expected prices for metallurgical coal have dipped.
Arch’s $1 billion of 7.25 percent notes due June 2021 dropped 3.7 cents to 91 cents, the biggest decline since they were issued in May, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield climbed to 8.74 percent from 8.11 percent. The company’s $1 billion of 7 percent notes due June 2019 dropped 0.75 cent to 91.75 cents on the dollar, the biggest decline in three weeks.
JPMorgan lowered its opinion on the bonds after the 7.25 percent notes increased 14 cents since July 26 to 94.7 cents on the dollar yesterday, analyst Dave Katz wrote in a note to investors today.
The analyst’s recommendation reflects a decline in prices for metallurgical coal, which is used to make products such as steel. Spot prices for hard coking coal at $164 per tonne are down from benchmark contract prices for the third quarter of 2012 of $225 per tonne, Katz wrote. While prices of thermal coal used for heating have climbed, the price is unlikely to increase further after a 15 percent drop in natural gas prices since July to $2.72 per million British thermal units, Katz wrote.
Katz said he expects Arch Coal’s earnings before interest, taxes, depreciation and amortization to decline from $615 million to $360 million if coking coal prices remain at about $180 per tonne for 2013. Arch will perform better than other producers more dependent on metallurgical, or met, coal, such as Bristol, Virginia-based Alpha Natural (ANR:US) Inc. Met coal accounts for 20 percent of Alpha’s volume and 5 percent of Arch’s, he wrote.
High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
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