The troubled met coal producer Walter Energy (NASDAQOTH:WLTGQ) has announced that it will begin idling its Canadian operations, including the Wolverine and Brazion coal mines. This move came as a logical continuation of a series of steps to turn around the struggling company. Walter Energy had already curtailed production at one Canadian mine, Willow Creek, last year. The company has also slashed its dividend and undertaken several refinancing efforts. Despite this, Walter Energy is still in a race against the clock.
Canadian mines were destined to be idled at current prices
Cost performance at Walter Energy's U.S. and Canadian operations differed dramatically in the fourth quarter. Average cash cost of sales at U.S. operations was $90.28 per ton, while average cash cost of sales at Canadian and U.K. operations was $130.10 per ton. As a result, Canadian and U.K. operations were a source of its $46.6 million operating loss in the fourth quarter.
Walter Energy, which carries an almost $2.8 billion debt burden, couldn't afford to burn cash at its Canadian operations any more. Walter Energy's last debt offering signaled that the bond market demands very high interest rates to finance the company. Walter Energy clearly needed to stop the leakage of cash in order to maintain access to financing markets.
Unfortunately for Walter Energy and other met coal miners, the idling of Canadian operations is unlikely to have any effect on met coal prices. The market continues to be oversupplied. Companies with mines in Australia like BHP Billiton (NYSE:BHP) and Peabody Energy (NYSE:BTU) can afford running their operations at current prices. In fact, BHP Billiton's Caval Ridge mine in Australia will start production in 2014 and will bring an initial 5.5 million tons per annum of export met coal, more than offsetting the idled production from Walter Energy's Canadian operations.
Canadian operations will be hard to sell
Walter Energy stated that coal reserves at its Canadian mines remained valuable assets. This is true, but it will be extremely hard to extract value from these assets in the near term. It's difficult to think of a company that will be willing to acquire high-cost mines during the period of met coal overproduction and plunging met coal prices.
In my view, the sale is still the next logical step. Walter Energy needs to deleverage. The company recently raised $550 million from the debt market, but this money won't last long.
Walter Energy has to pay $260 million under 2011 credit agreement and senior notes payments this year. In 2015, this number will rise to $579 million. It's probable that Walter Energy will try to find a buyer for all or some of its Canadian mines closer to the beginning of the next year. However, the selling price is likely to be low, given depressed met coal market conditions and the fact that Walter Energy has little negotiating power in current circumstances.
The idling of Canadian operations will have an immediate positive impact on Walter Energy's cash flows. What's more, the sale of these assets is likely around the corner. Still, there's a long way to go before Walter Energy finds itself in safe waters. As of now, the outlook for the company remains muted.
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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.