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Unfortunately, 2014 Could Be Just As Bad As 2013

Walter Energy (NASDAQOTH: WLTGQ  ) is focused more on metallurgical coal than just about any other U.S. coal miner, with met making up about 80% of its business. That was a rough place to be in 2013, and full-year results are going to be bad. Unfortunately, key industry participants are suggesting that 2014 won't be much better.

Too much damage
The loss through the first nine months of 2013 at Walter totaled $2.95 a share. While there are some one-time charges in those numbers, the big hit was on the revenue front, where "The selling price for HCC averaged $133.72 per metric ton (MT), down from the third quarter of 2012 average pricing of $196.66 per MT. Low-vol PCI pricing averaged $121.76 per MT in the third quarter of 2013 compared with $160.37 per MT in the prior year comparable quarter."

Although the company was able to reduce its production costs by around 10%, that couldn't make up for price drops of 32% and 24%. Even if pricing firms up, it would need to increase notably from recent levels to push Walter's bottom line back into the black. Look for another year of red ink when the company reports full-year results later this month.

And don't expect 2014 to be much better. That's because of the trends that companies like Peabody Energy (NYSE: BTU  ) and Joy Global (NYSE: JOY  ) highlighted in their full-year 2013 conference calls.

Other people talking
Peabody, the coal industry giant, has an interesting perspective on U.S. met coal. The company produces metallurgical coal out of its Australian operations, but doesn't mine any met in the United States. While that's a statement in its own right, it gives management an arm's length interest in domestic met developments.

During Peabody's conference call, CEO Gregory Boyce summed it up saying, " can only have that strategy of losing money and waiting and sitting for so long." Basically, from his perspective, a lot of U.S. met miners were hoping to wait out the price decline. Railroads like CSX (NYSE: CSX  ) helped drag that out by reducing prices to help out key customers.

In fact, during the CSX full year 2013 conference call, executive vice president Clarence Gooden noted that, "...rail pricing will remain low in order to help keep U.S. coal competitive globally." That's good news for met miners, but it means the railroad is expecting another tough year for the coal market.

But keeping prices low is much different than lowering prices. Peabody's Boyce thinks that railroads have "...done what they can, so there is no more to be added there..." Which means that met coal price increases need to come before anything is going to change for companies like Walter.

Supply and demand
The thing is that demand remains strong in key markets like China. That's why Teck Resources (NYSE: TCK  ) was able to send record amounts of steel-making coal to Asia in the third quarter. Low selling prices, however, led to a nearly 40% drop in earnings. In fact, CEO Don Lindsay noted that, "...the current price for steel-making coal remains below what we believe is required to sustain adequate production in the industry in the long term."

Basically, he's saying there's too much supply, and it's depressing prices. That situation doesn't look like it's going to improve in the near term, according to Joy Global. Edward Doheny, Executive Vice President of the mining equipment maker, paints a dour picture of the met market by saying, "We know where we put in a lot of our longwall systems around the world. And so we know we have some high productivity, low-cost production coming online in 2014." More supply will just drag out the problems.

Another tough quarter and another tough year
Walter Energy's fourth quarter is going to cap a bad year. And 2014 looks like it may be yet another difficult one for companies focused on metallurgical coal. Although that will be a headwind for Alpha Natural Resources (NASDAQOTH: ANRZQ  ) and Arch Coal (NYSE: ACI  ) , where met accounts for about 45% of each company's business, neither is as focused as Walter on met. Don't expect Walter to start turning the corner until late 2014 or 2015.

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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