Thermal coal miners' shares experienced a bounce after CONSOL Energy (CNX 0.58%) stated that thermal coal demand was strong in the first quarter and raised its annual coal production guidance. However, I don't see much reason for optimism over Alpha Natural Resources (NYSE: ANR), which had 2013 revenues that were equally split among thermal coal and met coal. Here's why.
Most thermal coal is already committed and priced for 2014
Alpha Natural Resources has already committed and priced 98% of its Western thermal coal operations production. It has also committed and priced 76% of its Eastern thermal coal production. Thus, Alpha Natural Resources has very limited exposure to any possible upside on the thermal coal price front in the near term.
In current conditions, when Alpha Natural Resources' cash flows are pressured by low prices, I believe that near-term prospects are as important as long-term prospects. The company carries $3.4 billion of debt, with $258.4 million maturing in the next three years. What's more, this debt will generate $240 million-$255 million of interest expenses in 2014, according to company's calculations.
Alpha Natural Resources swung to negative operating cash flow in the fourth quarter, and the company will face a serious test when it reports its first quarter results. The first quarter report will show whether Alpha Natural Resources' thermal coal segment performance will offset negative impact from its met coal operations.
Met coal segment results will push earnings lower
Alpha Natural Resources produces lower quality met coal that is priced at a discount to the benchmark met coal price. Importantly, prices for lower quality met coal are under even more pressure than higher quality met coal prices. Alpha Natural Resources sold its met coal for $96.53 in the fourth quarter, and has committed and priced 56% of its 2014 met coal production at $94.66 per ton.
The fact that Alpha Natural Resources has not priced 44% of its 2014 met coal production leaves the company significantly exposed to met coal price fluctuations. Its peer Walter Energy (WLTGQ), which is a pure met coal play, is even more sensitive to near-term price conditions. Walter Energy primarily sells its production under contracts with pricing terms of three months.
Currently, it looks like met coal segment results will drag on Alpha Natural Resources' overall first quarter results. Met coal prices tested new lows in the first quarter, and there are no signs of improvement as we head into the second quarter of this year. In such conditions, it will be hard for Alpha Natural Resources to show meaningful improvements on the operational cash flow side.
Bottom line
While there are signs that the situation on the thermal coal front is stabilizing, it brings little relief to Alpha Natural Resources. The company has low exposure to thermal coal price changes this year, while it maintains significant exposure to met coal price volatility. In addition, big debt continues to weigh on the company's performance. The upcoming first quarter results will be a big test for Alpha Natural Resources' valuation. Analysts are expecting a loss of $0.57 per share, and any negative surprise will drive shares further down.
