Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Why Long-Term Fundamentals Don't Matter for These Coal Miners Right Now

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

BHP Billiton's (NYSE: BHP  ) coal segment president Dean Dalla Valle recently stated that oversupply is likely to pressure coal prices for some time. Meanwhile, he is optimistic about the future of coal, as demand will continue to grow over the years. However, there's little relief in his words for coal miners like Walter Energy (NASDAQOTH: WLTGQ  ) and Alpha Natural Resources (NASDAQOTH: ANRZQ  ) , as they need improvements on the pricing side as soon as possible.

Cash slipping away from Walter Energy
Walter Energy is burning cash quarter after quarter. The company had negative operating cash flow of $27 million last year. Walter Energy cut its 2014 capital expenditures to $150 million, but it still had to finance it through debt. At current met coal prices Walter Energy is unable to finance its capital spending needs from its operational cash flow.

Meanwhile, financing through debt becomes increasingly expensive for the company. The company recently obtained $550 million from the debt market, but the rates were extremely high. In its annual report, Walter Energy states that its cash obligations total $407 million this year. This means that the company can get through this year with the cash that it received through debt.

However, Walter Energy is likely to return to the debt market as soon as 2015. What will the rates look like for the company at that time? A lot will depend on the level of met coal prices. If they stay where they are now, the rates will likely increase even more. If they continue to decline, Walter Energy could face a situation when the debt market will be shut for the company.

Alpha Natural Resources also needs a better price environment
Alpha Natural Resources' situation is a bit easier. The company's revenues were evenly divided between met coal and thermal coal last year. Less exposure to met coal puts Alpha Natural Resources in a better position, as thermal coal prices suffered less downside than met coal prices. However, there are warning signs.

The company swung to negative operating cash flow in the fourth quarter. The debt schedule of Alpha Natural Resources is easier than Walter Energy's, but the debt burden remains high at $3.4 billion. The company's capital spending will likely exceed its operating cash flow. Alpha Natural Resources had $620 million of cash on the balance sheet at the end of the year, so the company has a sufficient liquidity cushion for some time.

Even though Alpha Natural Resources is in better shape than Walter Energy, it still needs fast improvements on the coal pricing side. So far, the downside in prices outpaced Alpha Natural Resources' cost-cutting efforts. If this continues in the future, shares of the company will experience more pressure.

Bottom line
Sometimes short-term dynamics are more important than long-term prospects. Right now this is the case for both Walter Energy and Alpha Natural Resources. There is no use in thinking about where coal prices will be five years from now, because at first these companies have to get there. Walter Energy is in a more vulnerable position, as heavy debt and lack of positive operational cash flow endangers its business. 

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.


Read/Post Comments (1) | Recommend This Article (1)

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 April 03, 2014, at 12:48 PM, yannismail24 wrote:

    It seems to me that you are getting it wrong about WLT all the time...last May you were advising people that "Its time to be bullish in WLT". From the date of your recommendation WLT fell from about $19 to 9.92 in a little over a month...

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: 2901511, ~/Articles/ArticleHandler.aspx, 9/3/2015 12:51:58 AM

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...

Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

Today's Market

updated 3 hours ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 3:59 PM
ANRZQ $0.04 Down +0.00 -5.54%
Alpha Natural Reso… CAPS Rating: **
BHP $34.92 Up +0.84 +2.46%
BHP Billiton Limit… CAPS Rating: ***
WLTGQ $0.09 Up +0.00 +2.22%
Walter Industries,… CAPS Rating: **