Do Cost-Cutting Efforts Make This Coal Miner a Buy?

Coal miners push as hard as possible to lower their expenses in the face of low coal prices. Alpha Natural Resources (NYSE: ANR  ) is not an exception. The company has recently announced that it targets an additional reduction of operating and support expenses by at least $200 million annually in 2014 and beyond. Will this help the troubled miner gain some love from investors?

Savings are good, but the company needs more than this
Even if the savings target is met, it would not be enough to push the company into profitable territory. Alpha Natural reported a third-quarter adjusted net loss of $134 million, compared to a $121 million net loss in the second quarter of this year.

Alpha Natural amassed $3.35 million of debt, which would lead to at least $240 million of interest expense in 2014. This is an additional burden on the company, and this burden would not go anywhere for the foreseeable future.

Alpha Natural states it is going to produce 79 million-90 million tons of coal in 2014. If this production target is met, it would most likely be a decrease from the 86 million-91 million tons of coal that are expected to be produced in 2013.

Market remains oversupplied
In current market conditions, this is the picture that you would like to see in most coal miners. However, this is not the case. Oversupply is remaining a big problem for the market. Global players continue to increase their capacity. BHP Billiton (NYSE: BHP  ) expects to produce 41 million tons of met coal and 73 million of thermal coal in 2014. BHP's met coal is exported to China, which is on pace to account for an estimated 22% of the world's consumption of seaborne met coal this year.

Vale (NYSE: VALE  ) plans to open a met coal mine in Mozambique in the second half of 2015. Vale states that the mine would produce up to 11 million tons of coal per year. However, rising tension in the country puts the future of Vale's project in question. Both BHP Billiton and Vale count on gaining market share and pushing weaker peers from the market. In the near term, this strategy puts additional pressure on an already troubled market.

Cautiously optimistic on future performance
No matter how hard Alpha Natural tries to lower the costs, it needs coal prices to rise. The company stated that Chinese seaborne met coal imports increased 89% year to date. If the country continues to increase the demand for import met coal, it would ultimately result in higher prices. All eyes are on China, and any slowdown in demand from this country is a big risk for the fragile market.

Cost-cutting efforts from Alpha Natural put the company into a good position. The company finished the quarter with $1 billion in cash. Maintaining a good liquidity position is vital in the current environment, as Alpha Natural would inevitably have to refinance its debt.

Alpha Natural's shift to met coal is positive too. Thermal coal is likely to remain under pressure from cheap natural gas and environmental legislation. Met coal brought 46% of revenue in the third quarter. Prices were low, and Alpha Natural stated that they started to rebound in the beginning of the fourth quarter.

There is a slight chance that Alpha Natural could turn to profitability in 2015 if coal prices rise and its own cost-cutting efforts are a success. In that case the company, which is trading at less than 40% of its book value, is an interesting bet.

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