Which Coal Miner Will Throw in the Towel Next?

James River Coal just declared Chapter 11 bankruptcy. Who's next in line?

Apr 17, 2014 at 12:30PM

The problems at James River Coal (NASDAQOTH:JRCCQ) were becoming increasingly obvious as 2013 drew to a close, but the crescendo was missing a debt payment in mid-March. In fact, the miner's early-April Chapter 11 filing is almost anticlimactic. But it highlights the continuing dangers facing coal miners. So which might be the next to fall?

An issue of steel
Broadly speaking, there are two sides to the coal industry: thermal coal used in power plants and metallurgical coal used in steelmaking. Even though the thermal side of the industry has suffered through a domestic downturn because of relatively low natural gas prices, well-positioned miners have held their own and continue to turn a profit.


(Source: Ildar Sagdejev, via Wikimedia Commons)

Although avoiding red ink was touch and go for some, focusing on cost containment has allowed these miners to remain in the black. And now that Powder River Basin coal prices are hitting two-year highs, there's a silver lining starting to form on the thermal coal cloud.

This is in stark contrast to metallurgical coal, where prices remain relatively weak and there's not much hope of a pricing upturn until late this year or early 2015. About half of James River's coal business is met coal. The bigger problem, however, is that it bought into the metallurgical arena when met coal prices were much higher. That saddled the company with debt that, in hindsight, it couldn't afford.

Similar story
A very similar story has played out at Arch Coal (NYSE:ACI), which bought into metallurgical coal at the peak using debt. Now that this sector is out of favor, Arch is working hard to ensure it has enough cash to survive. It had about $1 billion at the close of 2013, and it sold two business this year in an effort to raise even more.

Last year, met coal made up about 20% of the company's business and PRB thermal coal 45%. With PRB starting to pick up, it looks like Arch will survive, but it's worth keeping an eye on the company's balance sheet just in case. That's particularly true since the last two years have each seen losses of over $3 a share. That's a trend that can only last for so long before it becomes a big problem, particularly with Arch's long-term debt hovering around $5 billion (about 70% of the capital structure).


(Source: Lyn Lomasi, via Wikimedia Commons)

In fact, the coal market downturn has already led to the near elimination of the company's dividend. In 2011, Arch paid a full-year dividend of $0.43 a share. The run rate today is $0.04, which is little more than a token.

Debt refinancing efforts at Walter Energy (NASDAQOTH:WLTGQ) should also be on your radar screen. This company generates almost 90% of its revenue from met coal and recently issued debt with a payment in kind, or PIK, provision. That's great if Walter runs into financial problems because it lets the company issue new debt to bondholders instead of paying them in cash. But it suggests that Walter is preparing for a day when it has to do that.

Like Arch, Walter has been losing money over the last two years. And with a focus on met coal, that's not likely to change in 2014. At the start of the year, long-term debt was about 80% of Walter's capital structure. So Walter might actually make use of that PIK provision sooner than its new bondholders hope. If it does, look for the shares to drop even further.

The ends of the spectrum
Watching James River go down should make you worry about Walter and other miners heavy into met coal, as well as more diversified miners with notable debt loads, like Arch. There are signs that coal is starting to turn the corner, but that hasn't happened yet and there's still enough pain in the market to take a weakened miner down.

Bankruptcy is a company's backstop, what's yours?
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Reuben Brewer 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information