Walter Energy (WLTGQ) had a tough year, losing more than 55% of its capitalization. The met coal miner found it difficult to operate profitably while met coal prices were depressed. Walter Energy's shares have stabilized since September after falling during the first half of the year. The company's performance in 2014 will be crucial for its future.
The debt burden
Walter's $2.7 billion debt continues to weigh on the company. The first significant $306 million payment is due in 2015. This will be a test for a company that has had negative operational cash flow in the first three quarters of this year.
So far, Walter managed to refinance portions of its debt. The company issued $450 million of 8.50% senior notes due 2021 back in March. Since then, obtaining money got more expensive for Walter, and the company issued $450 million 9.5% senior notes due 2019 in September.
Another coal miner, Alpha Natural Resources (NYSE: ANR), has recently chosen to issue $300 million convertible notes. Alpha Natural will pay just 4.875% interest on those notes. However, if those notes are converted into shares, they will dilute the shares of existing stockholders.
It is clear that refinancing will get even more complicated if Walter Energy does not manage to get positive cash flow from its operations. The company could chose to issue convertible notes like Alpha Natural Resources, but this move will negatively affect the already beaten stock.
The room for maneuver
Walter Energy has several restrictions under existing debt facilities. For example, the company must have at least $225 million of liquidity. Walter's 2014 capital expenditures are limited to $200 million under those restrictions. At the same time, the company itself is reluctant to spend under current conditions – this year's capital expenditures will reach just $150 million.
Walter Energy finished the third quarter with $293 million of cash on hand and $375 million under revolving credit facility. This liquidity will be enough to get Walter Energy through 2014. However, the world won't end in 2014, and Walter will have to once again refinance its debt.
The company desperately needs an improvement on the met coal price side. Unfortunately, the market remains pressed by oversupply. Australian mines play a big role in this process. Helped by the weakness in the Australian dollar, companies like BHP Billiton (BHP 2.55%) continue to flood the market with additional coal. For example, BHP expects to start production at Greenfield mine in Australia in 2014. The mine will produce an initial 5.5 million tons per annum of export metallurgical coal.
In current conditions, Walter Energy is not pressed to sell its assets. In my opinion, such a move will deteriorate the existing shareholder value, as the asset prices are depressed. Back in 2011, Walter Energy acquired Western Coal for $3.3 billion. As of now, the entire Walter Energy capitalization is under $1 billion. The sale of assets will turn a paper loss into a real one.
Bottom line
In my opinion, Walter Energy continues to have some flexibility. The company has managed to refinance a portion of its debt this year, although the price for this was hefty. The company must hope that continuing Chinese growth will eventually outpace the oversupply of the coal market.
If prices do not improve in 2014, Walter Energy must find internal ways to cut costs and achieve positive operational cash flow. Otherwise, the company will be in big trouble.
