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Stock Analysis & Ideas

Arch Resources: The Ride Isn’t Over Just Yet

Arch resources (ARCH) is a thermal and metallurgical coal producer. The company operates various open-pit and underground mines throughout America. I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)

Recent Performance and Tailwinds

Arch Resources stock has almost doubled in value (year-over-year) as coal prices were sent flying. The past year has seen a recovery in the coal space as voids in the global energy mix had to be filled amid supply-chain disruptions.

Arch also produces high-quality coking coal, which directly correlates with the steel industry that saw strong recoveries as well during 2021 as prices rose sharply.

The company commenced operations in its Leer South mine in September after spending roughly $400 million on the development of the property. The mine is anticipated to produce an additional 4 million tons annually and allow it to facilitate the firm’s rising off-take agreements.

Outlook

Coal supply has hit a new 24-year low as electricity generators have struggled to cope with the growing seasonal demand.

Stockpiles have drawn down to the 84 million ton level after starting the year at 125 million tons. Burning more coal has been the alternative during a time of surging oil and natural gas prices, but because producers have been cutting output for years for ESG reasons, the global capacity isn’t what it used to be.

Arch is set to exploit the growing supply/demand dilemma with its strong market position. According to the company’s CEO, Paul Lang, “Looking ahead, we expect global steel demand to continue to expand around the world in the near to intermediate-term, supported by the ongoing economic recovery and a resumption in the buildout of large, new integrated steel mills in Asia. With our world-class metallurgical asset base, premium High-Vol A product slate, industry-leading ESG performance, and top-tier marketing and logistics expertise, we believe we are increasingly well-positioned to generate substantial, long-term value for our stockholder base and other key stakeholders.”

Valuation

Arch is trading at sector discounts of 47.4%, 64.4%, and 36.3% in its price-to-sales, forward price-to-earnings, and forward price-to-cash-flow ratios, respectively. The stock is significantly undervalued relative to its peers and seems like a better investment opportunity than most other coal miners.

In addition, Arch is also a momentum play with the stock trading above its 10, 100, and 200-day moving averages.

Wall Street’s Take

Turning to Wall Street, Arch Resources has a Strong Buy consensus rating, based on four Buys and one Hold assigned in the past three months. The average Arch Resources price target of $113.40 implies 38% upside potential.

Concluding Thoughts

We’re seeing a recovery in the coal market as it’s required to fill voids in the supply crisis. I firmly believe that coal’s future usefulness is underestimated, and the clean energy transition won’t be a simple hop, skip, and jump process. Arch Resources shows excellent potential with its impressive coking coal mining projects, and its stock is also undervalued relative to the sector.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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