Tough Year Ahead for This Coal Miner

Alpha Natural Resources struggles from low pricing, and unfortunately the losses are likely to continue.

Feb 14, 2014 at 9:07AM

Life for met coal miners like Alpha Natural Resources (NYSE:ANR) and Walter Energy (NASDAQOTH:WLTGQ) 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.


Vladimir Zernov has no position in any stocks mentioned. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers