Alpha Natural Resources (NYSE: ANR) has been one of the most challenged coal miners this year. The company's high exposure to the met coal market has put increased pressure on its shares, along with shares of Walter Energy (WLTGQ), which is a pure met coal play. Alpha Natural Resources' first-quarter results improved in comparison with the previous quarter. Is this the start of an upward trend?
Production cuts
Alpha Natural Resources lowered its 2014 met coal shipment guidance to 15 million-18 million tons, down from previous guidance of 16 million-20 million tons. However, the company does not expect to idle any mines like Walter Energy, which recently decided to idle its Canadian operations.
During its earnings call, Alpha Natural Resources stated that it had no major mining complexes that it wanted to shut down. As this statement was reiterated several times during the question and answer session of the earnings call, it is likely a firm commitment for this year. Instead, Alpha Natural Resources plans to regulate its production levels through the quantity of mining shifts at its mines.
What's more, Alpha Natural Resources has committed 95% of its 2014 met coal production, so the company doesn't have much room left for production cuts. It is unlikely that Alpha Natural Resources will make significant changes to its existing contracts with customers.
Alpha Natural Resources estimates global met coal oversupply at 15 million tons to 20 million tons, in line with other met coal producers' estimates. Teck Resources (TECK 2.42%) recently stated that 35 million-40 million tons of seaborne met coal were produced at negative margins. However, production is being cut slowly. And Alpha Natural Resources is not awaiting significant positive changes on the met coal front this year, although it anticipates more production cuts in the coming months.
Near-term liquidity remains sufficient
Although the company is surely under pressure, it doesn't have any near-term liquidity problems. Alpha Natural Resources finished the first quarter with $2.1 billion of liquidity, which consisted of $1.2 billion of cash and cash equivalents and $900 million under an available credit facility. This is more than enough for the near term, as the company's cash burn is not significant.
Alpha Natural Resources had negative operational cash flow of $54 million in the first quarter. Importantly, $30 million of this cash outflow was an escrow payment for a shareholder class action litigation settlement, which is a one-time event. Met coal production cuts will likely bring improvements to the cash flow side, although these improvements will not be significant because the cuts are modest.
The company also reduced its guidance for the adjusted cost of coal sales in its Eastern coal operations, which consist of both met coal and thermal coal mines. However, only the high end of guidance was reduced, so one should be cautious about the magnitude of cost improvements.
Bottom line
It's too early to say that the worst is behind Alpha Natural Resources. However, the company has made progress in reducing the leakage of cash compared with the fourth quarter of 2013, which opens the door for cautious optimism about its future performance. Still, 2014 is going to be a tough year for the company, as most of its production is already committed and received pricing that deserved to be better.
