Shares of Alpha Natural Resources
How it got here
We don't have to dig too deeply (pun completely intended) to decipher why Alpha Natural Resources is hitting a new 52-week low -- blame it on coal.
Alpha Natural Resources supplies both steam coal, used by utilities in electrical generation, and metallurgical coal used to strengthen steel. The drop in prices across both sectors has been steep and precipitous with utilities abandoning coal in favor of natural-gas-powered facilities and a general global slowdown hampering steel sales. That is a recipe for disaster for much of the coal sector.
We've begun to see those fears translate into tangible worries as Patriot Coal filed for bankruptcy protection earlier this week after failing to renegotiate the terms of its loans. James River Coal (Nasdaq; JRCC) also dove in sympathy, as it has $416 million in net debt and large expected quarterly losses to contend with in the near-term.
In response to weakened demand, low coal prices, and growing supply worries, many coal companies have taken to cutting production, closing mines, and even jettisoning coal assets. Alpha Natural reduced the midpoint of its production guidance by 7.5 million tons in the first-quarter. Both Arch Coal
How it stacks up
Let's see how Alpha Natural Resources stacks up next to its peers.
The race to the bottom is on, and outside of Cliffs Natural, whose outstanding dividend has boosted its appeal among investors, it's anyone's game.
|Alpha Natural Resources||0.2||2.2||N/M||40.1%|
|James River Coal||0.2||0.5||N/M||152.7%|
|Cliffs Natural Resources||1||3.1||3.8||53.7%|
Sources: Morningstar and Yahoo! Finance. N/M = not meaningful.
If you can stand the risk and don't mind weeding through the coal companies that have very limited access to capital, the coal sector looks like a screaming buy.
In all fairness, most of Cliffs Natural Resources' sales come from its iron ore mining operations; but even so, its dividend growth and yield of 5.5% is impressive -- as is its extremely cheap valuation.
CONSOL and Arch also offer quarterly payments to shareholders, albeit they are heading in separate directions. CONSOL's yield of 1.7% may not be much to look at, but at least it's on the rise. Arch Coal recently slashed its quarterly payout from $0.11 to $0.03 in order to conserve cash.
Alpha Natural is still in the process of realizing its cost synergies from its merger with Massey Energy one year ago. Although it's been a bumpy ride, Alpha is the best-capitalized of the bunch with access to $1.8 billion in cash plus revolving credit.
Finally, James River Coal is a disaster and its valuation reflects this. With few lending prospects available and losses expected over the coming quarters, it may follow Patriot Coal down the path to bankruptcy.
Now for the $64,000 question: What's next for Alpha Natural Resources? The answer is going to depend on whether coal prices and demand improve on both the thermal and metallurgical ends, and if Alpha Natural is prudent with its spending and production so as not to overextend itself during a very weak period of demand for coal.
Our very own CAPS community gives the company a three-star rating (out of five), with 94.7% of members expecting it to outperform. Although I've yet to make a CAPScall in either direction on Alpha Natural, I'm going to stick with my general bullishness on the long-term outlook of coal and enter a CAPScall of outperform.
The reasoning here is pretty simple: I feel coal is a strong long-term buy! Much of coal's recent declines are because of a warmer-than-normal winter and record-low natural gas prices which caused utilities to switch over to natural gas. As I've proposed before, the weather is hardly a consistent indicator of success (for all we know next winter could be colder than normal), and natural gas prices would rebound -- and they have! As these factors return to more normalized levels, demand for coal will pick up and well-capitalized companies like Alpha Natural, which are now bigger and realizing the cost savings of its Massey Energy merger, will be ready to capitalize!
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