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
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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
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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
