Will Other Coal Miners Follow Walter Energy's Path?

Alpha Natural Resources suffers from its high exposure to met coal, while the situation for Arch Coal and Peabody Energy is less tense.

Mar 27, 2014 at 10:19AM

Met coal miners find themselves under tremendous pressure this year, as market oversupply continues to weigh on met coal prices. The impact of prolonged met coal price softness is especially severe for the met coal producer Walter Energy (NASDAQOTH:WLTGQ), which is already down more than 50% this year. Will other met coal companies follow Walter Energy's fate and experience even more downside?

Alpha Natural Resources' reliance on met coal suggests further downside
Alpha Natural Resources
(NYSE:ANR) shares several of Walter Energy's problems. Although Alpha Natural Resources is not a pure met-coal play, it got as much as 50% of its revenue from met coal sales in 2013. Like Walter Energy, Alpha Natural Resources is plagued by the high debt load generated by the ill-timed acquisition of Massey Energy back in 2011.

The company had negative operational cash flow in the fourth quarter. As met coal pricing has deteriorated in the first quarter of this year, Alpha Natural Resources could suffer another quarter of negative results. The recent debt offering made by Walter Energy clearly showed the increasing difficulty in receiving financing for met coal miners. However, Alpha Natural Resources' debt schedule is easy in the coming years, so the company may not be forced to enter the debt market.

All in all, the company's position looks weak. Alpha Natural Resources' shares are already down 41% this year, but I expect further downside in case met coal prices fail to recover. Interestingly, Alpha Natural Resources got committed and priced contracts for most of its steam coal production. At the same time, it fixed contract prices for only 56% of its met coal production, which leads to lower realized prices for the remainder of production as met coal prices continue to fall.

Arch Coal and Peabody Energy are in a better position
Thermal coal-heavy Arch Coal (NYSE:ACI) and Peabody Energy (NYSE:BTU) are less exposed to the met coal pricing story. Peabody Energy targets to sell 16 million-17 million tons of met coal from its Australian mines, while Arch Coal plans to sell 7.5 million – 8.5 million tons of met coal in 2014. The lack of exposure to met coal has clearly helped Arch Coal's shares, which are roughly flat this year.

The debt loads of both companies remain high and continue to weigh on their performance through the incurred interest expense. Still, both Arch Coal and Peabody Energy are in a better situation than Walter Energy and Alpha Natural Resources. In fact, Peabody Energy managed to stay profitable for three quarters in a row. This distinguishes Peabody Energy from other coal miners that are suffering from continuing losses.

Bottom line
Alpha Natural Resources will most likely follow Walter Energy's path and continue to lose value. The fact that Alpha Natural Resources supplies lower quality met coal, which is priced lower, adds to the pressure. As met coal prices continue to fall, so will Alpha Natural Resources' shares.

While Arch Coal and Peabody Energy feel less pressure from the met coal side, their upside is limited. It is difficult to expect significant improvements on the thermal coal price front, as natural gas prices remain weak. This fact will continue to pressure both companies' margins.

Boost your 2014 returns with The Motley Fool's top stock
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 www.fool.com/podcasts.

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 www.fool.com/podcasts, 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