Alpha Natural Resources (NASDAQOTH: ANRZQ ) lost a little over $5 per share in 2013. Arch Coal (NYSE: ACI ) lost a touch over $3 a share. While these losses actually represented improvements for each company, those are big losses for investors to swallow. If Arch's first quarter loss of $0.60 a share is any indication, there's plenty more red ink ahead for this pair.
Nothing to look forward to
There's no question that 2013 was a tough one on Arch coal. According to the company's fourth quarter earnings release, "Consolidated 2013 sales price per ton declined versus 2012 levels, due to lower pricing on metallurgical and export thermal coal sales and a larger percentage of lower-priced tons in the company's volume mix." Basically, despite the positive of cutting costs, almost everything else went wrong.
How wrong? The average selling price of coal across Arch's business, which includes both thermal and metallurgical varieties, fell by nearly 20%. Sales volumes were down nearly 1%. Cutting average costs by 13% wasn't nearly enough to make up for that combination.
And the outlook for 2014 isn't looking too much better. In the fist quarter, Arch sold 1.5% less coal and its average price was down by nearly 2%, year over year. Worse, costs were up over 5%.
The big problem is met coal, which has increased to nearly 50% of Arch's Appalachia business from just under 20% in 2009. Basically, Arch expanded in met coal as the market was peaking. Although domestic thermal markets appear to be recovering, which will help Arch since it has a notable position in the Powder River Basin (PRB), met prices and demand are going to be more important to the top and bottom lines. And it doesn't look like there's going to be improvement on that front in the near term: According to CEO John Eaves, "first quarter results reflect a challenging global metallurgical coal market."
Another drag of a quarter
The story is pretty similar at Alpha Natural Resources. For example, the average sales price for met coal in the fourth quarter was $96.53 per ton, down from $121.27 in the fourth quarter of 2012. And it wasn't just met, "The decrease in adjusted coal margin was primarily attributable to lower per ton realizations across all of Alpha's production, including Eastern metallurgical coal, Eastern steam coal and PRB production." Cost cuts just weren't enough to offset price declines.
The future? Alpha changed its 2014 guidance in the fourth quarter, "in response to weak pricing for low-quality metallurgical coals, which are currently selling below thermal prices." The company's committed met coal sales in 2014 average just $94.66 per ton. With nearly half of the company's revenue coming from met coal, Alpha Natural Resources' results will remain weak until there's a met upturn. And clearly, the trend is still going the wrong way. Like Arch, Alpha is probably going to post a loss in the first quarter.
Is there any good news?
The bad met story and red ink aside, there's some good news to look for. Specifically, the PRB, where, in the fourth quarter conference call, Arch Coal CEO John Eaves noted a more than 40% spot price increase over 2012 lows. The PRB makes up about 45% of Arch's business and was one of the few bright spots, with Eaves noting, "we are encouraged by the strengthening dynamics in the U.S. thermal market."
The PRB only accounts for about 10% of Alpha's top line, so there won't be much of a silver lining to look for at the miner. But don't miss the update, because the improvement in the PRB could be the first sign of a domestic thermal upturn. If that eventually spreads out to other coal regions, the entire U.S. coal industry will see a lift. That said, bad weather probably kept PRB coal volumes light in the first quarter at both companies.
It is what it is
Arch and Alpha remain troubled coal miners. Although a PRB upturn is worth watching, its metallurgical coal that's going to be the key for a return to profitability for this pair. Don't expect that to happen anytime soon.
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