Coal Stocks Can't Seem to Catch a Bid

The bullish comments from Arch Coal were all but eliminated by the continued fears of an unfavorable outcome with James River Coal. The coal market should catch a bid if the weak miners are removed from the equation.

Feb 11, 2014 at 9:58AM

Even with soaring natural gas prices due to plunging inventories, coal stocks can't seem to catch any investor interest. The latest negative news comes from James River Coal, which is exploring strategic alternatives for its money-losing coal operations. The struggles don't end with James River Coal considering Arch Coal (NYSE:ACI) and Alpha Natural Resources (NYSE:ANR) face similar struggles to return to profits in the midst of the electric utility switch to natural gas and a preference for Illinois Basin coal when possible. The surge in natural gas prices should've helped alleviate the problem, though, if even in the short term.

James River Coal lists itself as the sixth largest producer in Central Appalachia and the fifth largest producer in the Illinois Basin. Prior to the coal collapse during 2013, the coal miner operated eight mining complexes that included 18 underground mines, nine surface mines, and 13 preparation plants. The company produced 9.5 million tons of coal for the year.

Due to lower coal prices and production cuts, analysts expect revenue to plunge 40% for 2013 to only $660 million. Even further declines are expected in 2014 with four Central Appalachia mines closed during Nov. and the potential for more closed mines due to the strategic review. The situation is so bad that even the current quarter faces a 30% revenue decline and huge losses beyond $1 per share.

Strategic alternatives never a good sign
Typically the decision to search for strategic alternatives means that a company is in a desperate situation. In this case, James River could cut production even further or sell mines to other investors. The latter case might be negative for the market if the new owners were to have larger access to capital to invest in the mines. Competitors like Arch Coal and Alpha Natural Resources would be more than happy to see James River shutter more mines and reduce inventory in the markets.

For now, James River Coal has amended the Revolving Credit Agreement to keep the company financed for now. Also, it has hired Perella Weinberg Partners LP as restructuring advisor and Deutsche Bank Securities as M&A advisor.

But Arch Coal sees market improving
Last week during the fourth-quarter earnings report, Arch Coal preached that the domestic thermal coal market was improving due to the high natural gas prices and the electric utilities switching back to coal. The company provided an interesting prediction that additional draw downs of coal inventories in 2014 would lead to the lowest levels of coal at thermal customers since 2005. At the same time, Arch Coal is reducing capital expenditures for 2014 to below $200 million after spending over $400 million back in 2012.

As significantly larger coal miners with access to more liquidity, Arch Coal and Alpha Natural Resources were both able to unload non-strategic assets for significant cash to help stem the downturn in the sector. Arch Coal recently sold the Canyon Fuel subsidiary for $423 million in cash while Alpha Natural sold its joint venture with Rice Energy (NYSE:RICE) for $100 million in cash and $200 million of Rice common stock in the initial public offering that occurred back at the end of Jan.

Bottom line
The domestic coal industry is at the crossroads where the weak miners are forced to cut production at the very point inventories are near decade lows. The industry appears set for a rally if only it could remove the weak miners from the picture. A recovery appears all but imminent, though the sector can't catch a bid with fears of James River pulling the industry down.

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Mark Holder and Stone Fox Capital Advisor clients own shares in Alpha Natural Resources. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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