What's the Biggest Threat to Alpha Natural Resources Inc?

Exposure to met coal production continues to be viewed as a disadvantage for a coal producer. Alpha Natural Resources (NYSE: ANR  ) is a vivid example of this: Its shares have already lost 33% since the beginning of the year, while the thermal coal-heavy Arch Coal (NYSE: ACI  ) trades at levels seen in early January. Alpha Natural Resources' revenue was equally split between thermal coal and met coal in 2013. As the outlook for met coal prices deteriorates further, it is likely that the company's shares may experience even more downside.

Alpha Natural Resources has problems at current market prices
The met coal that Alpha Natural Resources sells is not of the highest quality, and it is priced with a significant discount to the benchmark price. The company received $96.53 per ton of met coal in the fourth quarter of 2013, while the benchmark price remained above $140. What's more, the company's cash flows remain exposed to further downside on the met coal price front, because only 56% of Alpha Natural Resources' projected sales volume in 2014 was committed and priced at $94.66 per ton.

In comparison, Walter Energy (NYSE: WLT  ) received $137.39 per ton of its highest quality met coal and $118.63 per ton for lower quality met coal in the fourth quarter. However, the company's indebtedness continues to weigh on its shares, and Walter Energy is down as much as 37% this year. On the bright side, Walter Energy managed to swing to a positive cash flow from operations in the fourth quarter. Unfortunately, further deterioration of the met coal price will likely push Walter Energy's operational cash flow back into the negative territory.

The situation in the thermal coal market looks better, as natural gas prices remain at higher levels than in the previous year. However, Alpha Natural Resources has already committed and priced 98% of its Powder River Basin steam coal production at $12.12 per ton and 76% of its Appalachian steam coal production at $58.88 per ton. In comparison, Arch Coal managed to commit and price its Powder River Basin production at $13.18 per ton. In the case of improved thermal coal pricing conditions, Alpha Natural Resources' benefits will be significantly limited, because the company has already signed contracts for most of its production.

Environmental agreement adds to the pressure
Alpha Natural Resources has recently announced that it entered into an agreement with the U.S. Environmental Protection Agency. Under this agreement, the company will pay $27.5 million in civil penalties. What's more, Alpha Natural Resources will dedicate $160 million of capital expenditures over the next three years to achieve water quality compliance.

Additional expenditures are not good news for the company's shareholders, as its cash flows remain pressured by weak prices. The company had $619.6 million of cash at the end of the year, so it is unlikely to experience short-term liquidity problems. Alpha Natural Resources' fourth-quarter operational cash flow was negative, and this is a worrying sign.

The company targeted $250 million-$300 million of capital spending this year. If operations do not contribute funds to the spending program, Alpha Natural Resources will be forced to seek cash elsewhere. In addition to the above-mentioned problems, the company will have to pay $240 million-$250 million of interest on its $3.4 billion debt this year.

Bottom line
Alpha Natural Resources is experiencing significant headwinds. The company produces lower quality met coal, and pricing for this type of met coal is under more pressure than the pricing for high quality met coal. Heavy debt continues to weigh on the company's performance through interest expense. All in all, Alpha Natural Resources' shares could experience more downside this year. 

Find out our top stock pick 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 (1) | Recommend This Article (2)

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.

  • Report this Comment On March 11, 2014, at 1:35 PM, Coalguy wrote:

    "The company received $96.53 per ton of met coal in the fourth quarter of 2013, while the benchmark price remained above $140"

    With respect, the author needs to do some research on how the benchmark price relates to the price U.S. Coal Producers report. Benchmark price is in metric tons FOB ocean vessel, while producers report in short tons FOB mine site. If you will do the math, you will see that the mine price is well in line with the benchmark if not above.

Add your comment.

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: 2872116, ~/Articles/ArticleHandler.aspx, 9/22/2014 6:32:47 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