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.

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