Tough Year Ahead for This Coal Miner

Life for met coal miners like Alpha Natural Resources (NYSE: ANR  ) and Walter Energy (NYSE: WLT  )  isn't getting any easier. Alpha Natural Resources' latest quarterly report confirmed the weakness on the met coal side, which was already mentioned in reports by thermal coal-heavy producers like Arch Coal (NYSE: ACI  ) and Peabody Energy (NYSE: BTU  ) .

Pricing is weak
Alpha Natural Resources stated that the trend of declining met coal spot prices continued in 2014. The company blames supply growth in Australia, partially fueled by the weak Australian dollar, and significant Chinese inventory levels for the continuing pressure on prices.

Alpha Natural Resources has already committed and priced a significant share of its 2014 production. For example, 76% of its Appalachian steam coal production is committed at $58.88 per ton. In comparison, Arch Coal's Appalachian steam coal contracts stood at $57.07. Alpha Natural Resources expects that cost of sales for Appalachian steam coal will be in the range of $64-$70 per ton, which means that the company will be losing money on each ton sold.

The company expressed cautious optimism about met coal pricing, stating that total met coal exports in 2014 were estimated to increase by only about 10 million tons, 6 millions of which would come from Australia. Last year, Australia raised its exports by 24 million tons. However, I don't share the optimism, as coal producers around the world hesitate to cut their production levels.

Some of them, like Peabody Energy, are even profitable at current prices, although the margins are very thin. However, most producers are afraid to lose customers and plan to weather the storm. Everyone waits for others to cut production. As a result, the problem of oversupply remains.

Buying time
Alpha Natural Resources has bought itself some time with the help of a series of note offerings. The company stated that it reduced its outstanding convertible notes maturing in 2015 from $824 million to $194 million during 2013.

This move eases the short-term pain for the company. However, the debt gets pricier as problems in coal markets continue. As a result, Alpha Natural Resources expects to spend $240 million-$255 million on interest expense in 2014. It's worth noticing that operational cash flow turned negative in the fourth quarter. Given the spot prices and the prices of the company's contracts, losses will continue.

The situation is more drastic for Walter Energy, which amassed its $2.8 billion debt to finance the acquisition of Western Coal back in 2011. Now, the situation is getting tough for the company, and it could be forced to sell these assets. Of course, such a sale would come at a big discount to the $3.3 billion that Walter Energy once paid for Western Coal. In comparison, Walter Energy's current market capitalization is just above $700 million.

Bottom line
Alpha Natural Resources' main problem is its serious exposure to met coal prices. Unlike thermal coal prices, which remain stable yet low, met coal prices continue to decline. As of now, it is difficult to find a catalyst to reverse this trend in the short term.

However, the company still has significant liquidity to wait for price improvements. This puts it in a superior position to Walter Energy, for which time could be running out. All in all, the weakness in pricing will continue to pressure Alpha Natural Resources shares.

Position your portfolio for the year ahead
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2838825, ~/Articles/ArticleHandler.aspx, 10/24/2014 7:11:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement