Walter Energy Wipes the Slate Clean

Sometimes turning over a new leaf begins with a lot of red ink.

Metallurgical coal miner Walter Energy (NYSE: WLT  ) recorded a $1.1 billion goodwill impairment charge -- equivalent to $17.05 per share -- to wipe the slate clean on the company's $3.2 billion acquisition of Western Coal during 2010. Essentially, the writedown reflects the disparity between the extremely bullish projections for met-coal demand and pricing that prevailed at that time, and the substantially moderated view of those market dynamics (and related cash flow projections from the assets acquired) presently unfolding.

And after suffering a dramatic share price decline since mid-2011, the company is also eager to turn over a new leaf in terms of defending its bottom line against these weaker market conditions. Judging by Walter's third-quarter results released this week, the company is performing pretty well along those lines. Despite the cost-elevating impact of the company's continued development of the Willow Creek mine, Walter defended its consolidated cash margins as well as a Fool could hope in the face of a 23% drop in the average realized selling price for its product. Particularly after considering the large 0.7-million-ton gap between production volume of 3.3 million tons and sales volume of just 2.6 million tons, I view the miner's posting of a $30 million adjusted quarterly profit a noteworthy achievement.

Expressing uncertainty regarding the prospects for recovery in the met-coal markets, CEO Walt Scheller stated: "[We] are focusing on achieving further cost reductions, tightly managing capital spending and reducing marginal production in order to improve our results and be well positioned going into 2013." Clearly the analysts are similarly uncertain about the forward outlook, with earnings projections for Walter Energy during the full-year 2013 ranging all the way from an uber-optimistic $5 per share to a loss of $0.40 per share!

Coal giant Peabody Energy (NYSE: BTU  ) , on the other hand, exuded considerably more confidence in its forward outlook for seaborne met-coal demand growth of between 10% and 15% for 2013. By stating my intention to hold my shares of Teck Resources (NYSE: TCK  ) through the year 2032, I think I have clearly conveyed my own confidence in the unbroken long-term outlook for seaborne met-coal demand.

Although the company stands head-and-shoulders above the acutely compromised financial position of struggling competitor Cliffs Natural Resources (NYSE: CLF  ) , Walter nonetheless needs to continue pinching pennies. The miner ended the third quarter with just $133.6 million in cash and equivalents, against a sizable debt burden of nearly $2.3 billion. Provided Walter Energy executes well on its stated goal of further reducing costs and conserving capital, I think the stock stands a strong chance of turning over a new leaf and gaining a little ground from its presently depressed state.

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  • Report this Comment On November 11, 2012, at 8:40 PM, DougMcClenaghan wrote:

    CLF mines so little coal they should not be considered a competitor. In the last 3 months, their coal revenue was only $241 million. CLF gets over 85% of its revenues from iron ore.

    As to the operating income, you state the 30 million operating profit as noteworthy.

    If you take away the $41 million income tax benefit, I come up with a paltry $3.6 million profit.

    Could you expound on where the $30 million quarterly adjusted profit came from?

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