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Rating Action:

Moody's revises Arch Resources' outlook to positive; affirms B2 CFR

04 Nov 2021

New York, November 04, 2021 -- Moody's Investors Service ("Moody's") affirmed all ratings for Arch Resources, Inc., including the company's B2 Corporate Family Rating ("CFR"), and revised the rating outlook to positive from stable based largely on the expectation that the company will reduce debt and non-debt liabilities in the near-term. Moody's also upgraded the company's Speculative Grade Liquidity Rating ("SGL") to SGL-1 from SGL-2 based on expectations for meaningfully stronger free cash flow generation in the next 12-18 months.

"Arch completed the Leer South project on time and on budget. Given the recent strengthening in coal market fundamentals, stronger export prices, and meaningfully lower capital spending, Arch should generate significant free cash flow in 2022 that will allow the company to reduce debt," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Arch Resources, Inc.

Affirmations:

..Issuer: Arch Resources, Inc.

.... Probability of Default Rating, Affirmed B2-PD

.... Corporate Family Rating, Affirmed B2

....Senior Secured Bank Credit Facility, Affirmed B2 (LGD4)

..Issuer: WEST VIRGINIA ECONOMIC DEVELOPMENT AUTHORITY

....Senior Secured Revenue Bonds, Affirmed B2 (LGD4)

Upgrades:

..Issuer: Arch Resources, Inc.

.....Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2

Outlook Actions:

..Issuer: Arch Resources, Inc.

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

Moody's expects that robust metallurgical coal prices will translate into stronger earnings and cash flow in the second half of 2021 with continued strength in 2022. Management indicated that the company's new metallurgical coal mine in West Virginia (Leer South) is completed and ramping up production. Business conditions in the Powder River Basin are temporarily strong on a variety of factors including high natural gas pricing in regions that consume PRB coal that encourages gas-to-coal switching by power generators and various logistical issues present across the region that limits the coal industry's ability to produce and deliver coal. As the company takes advantage of a strong market in 2021 and signs new contracts for 2022, Moody's expects a significant improvement in earnings and cash flow. Moody's expects that adjusted financial leverage will fall below 1.5x in the coming quarters and the company will generate enough cash to achieve a net debt zero position in 2022. The company will have the opportunity to leverage the current upcycle in pricing to achieve significant reduction of debt and non-debt liabilities.

However, Moody's believes that investor concerns about the coal industry's ESG profile are still intensifying and, notwithstanding current strength in coal pricing and better debt trading levels, coal producers will be increasingly challenged by access to capital issues in the early-to-mid 2020s. An increasing portion of the global investment community is reducing or eliminating exposure to the coal industry with greater emphasis on moving away from thermal coal. A shift toward metallurgical coal, compared to a legacy position more focused on thermal coal, is an emerging positive factor from an ESG standpoint. Moody's expects that Arch will shift in this direction, but maintain substantial thermal coal operations with a slow but steady scale down to occur in the coming years. The aggregate impact on the credit quality of the coal industry is that debt capital will become more expensive over this horizon, particularly in the public bond markets and other business requirements, such as surety bonds, which together will lead to much more focus on individual coal producers' ability to fund their operations and articulate clearly their approach to addressing environmental, social, and governance considerations -- including reducing net debt in the near-to-medium term. Arch reported about $555 million of total debt as of 30 September 2021.

The B2 CFR reflects a diverse platform of seven coal mining assets in the United States capable of strong cash flow generation. The company's approach to maintaining low debt levels and a significant liquidity cushion helped the company withstand difficult industry conditions despite severe earnings compression.Operational risk is a constraint, with meaningful concentration of earnings and cash flow expected at specific mining sites: Black Thunder thermal coal mine in the Powder River Basin, Leer mining complex in Northern Appalachia, and the new Leer South mining complex in Northern Appalachia. Credit quality is constrained more significantly by the inherent volatility of the global metallurgical coal industry, ongoing secular decline in the US thermal coal industry, and ESG factors. The rating also takes into consideration that some mining assets have less favorable long-term operating prospects in the coming years and, therefore, could be subject to more significant reclamation-related spending over the rating horizon.

The SGL-1 reflects our expectation for very good liquidity to support operations over the next 12-18 months. Moody's expects that the company will generate significant free cash flow in 2022. The primary source of liquidity beyond internally-generated free cash flow is the company's cash balance combined with modest availability under an accounts receivables securitization facility and an unrated inventory-based revolving credit facility. The SGL rating could be downgraded to SGL-2 if available liquidity remains below $300 million.

ESG CONSIDERATIONS

Environmental, social, and governance factors are important factors influencing Arch's credit quality. The company is exposed to ESG issues typical for a company in the coal mining industry, including increasing global demand for renewable energy that is detrimental to demand for thermal coal, especially in the United States and Western Europe. Exposure to carbon transition risk and environmental reclamation obligations are the most significant environmental exposures. Social issues include factors such as community relations, operational track record, and health and safety issues associated with coal mining such as black lung disease. Through capital investment in the Leer South project, Arch Resources has been reducing exposure to thermal coal, which carries greater ESG-related risks, and increasing exposure to metallurgical coal, which carries lower ESG-related risks. Arch Resources sold its last thermal coal mine in Appalachia in December 2019 -- a surface mine called Coal-Mac -- and has signaled an intention to reduce emphasis on thermal coal mining in other regions. Governance-related risks are representative of a publicly traded coal company with an ongoing emphasis on maintaining balance sheet cash and very good liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The positive outlook signals the potential for a rating upgrade in response to meaningful debt reduction. Moody's could upgrade the rating with expectations for free cash flow generation above $100 million, meaningful debt reduction, and financial policies consistent that support maintaining a low net debt position in the medium-to-long term. Moody's could downgrade the rating with weakening in metallurgical coal pricing below long-term averages, expectations for available liquidity to fall below $175 million, or any meaningful operational issues at the company's Black Thunder or Leer mines.

Arch Resources is one of the largest coal producers in the United States. The company has two mining complexes in the Powder River Basin, four mining complexes in Appalachia, and one mine in Colorado. The company generated about $1.5 billion of revenue in 2020.

The principal methodology used in these ratings was Mining published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1292752. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Benjamin Nelson
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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