The Met Coal Downturn Has Another Year to Go: Steer Clear of These Miners

The domestic thermal coal markets look like they are starting to bottom out, but the metallurgical coal side of the business is still hurting. That's likely to keep Alpha Natural Resources' (NASDAQOTH: ANRZQ  ) results in the red in 2014, but could turn Walter Energy (NASDAQOTH: WLTGQ  ) into a life or death situation.

A mile high view
Alpha Natural Resources is a diversified coal miner, selling both met coal and thermal. It's also got a global sales footprint, though it mines domestically. So Alpha can provide a good bird's eye view of the coal industry. The company lost $0.50 a share in the first quarter, but it's seeing some positives mixed in with the negatives.

On the positive side, Alpha CEO Kevin Crutchfield noted that, "The Powder River Basin is currently showing strength in light of very tight utility inventories and strong burn over the last three months. And we believe there is strong potential for this to continue." In addition, "Utility inventories in Northern Appalachia are also at multi-year lows," and "Contracting in Central Appalachia is beginning to look more promising too, with a meaningful increase in RFPs."

(Source: US House Subcommittee on Energy and Natural Resources)

This is good for Alpha because about half of its business is thermal coal. Around 40% of revenues are from the Eastern region, so the Powder River Basin (10% of revenues) uptick won't be enough to meaningfully help Alpha's results. Central and Northern Appalachia need to rebound, too. But, with nearly half of the top line coming from met coal, don't expect Alpha to turn a profit until this segment of the coal market turns higher.

That said, it isn't looking good on the metallurgical coal front. Alpha CEO Crutchfield puts the cards on the table: "we expect the oversupply in met to continue for most of 2014, but we do see the potential for a better supply demand balance and improved met pricing taking hold in 2015." So, 2014 will likely be another year of red ink for Alpha.

What's bad for Alpha is worse for Walter
Met coal makes up about 85% of Walter Energy's business. It's no wonder that the miner posted a loss of $1.47 a share in the first quarter. That's much worse than last year, when the company lost $0.79 a share in the first quarter. Walter's average met selling prices fell 17% year over year, a decline that was just too much to overcome with cost cuts.

Walter has been working hard to keep going through this rough patch. However, bulking up in met right before the peak may have turned this downturn into a life or death situation. That's why the company has been shutting operations, selling assets, and refinancing debt at less than advantageous interest rates.

(Source: Lyn Lomasi, via Wikimedia Commons)

Walter CEO Walter Scheller explained during the first quarter conference call: "The bottom line is this: Yes, the market continues to be plagued by low met coal prices, but consistent with our message over the past several quarters, Walter Energy continues to execute extremely well in the areas we control." And to be fair, he's correct, Walter is doing the right things.

However, the recent sale of a coal terminal for $25 million shows the enormity of the problem. At the end of the first quarter, Walter's long-term debt stood at $2.9 billion (about 80% of the capital structure). Add that $25 million to the $400 million of cash on the balance sheet and Walter is still too heavy on the debt side of things in a market that looks like it could have a year of pain ahead of it.

Nothing good to come
At the end of the day, neither Alpha Natural Resources nor Walter Energy are likely to see black ink this year. A still struggling met market will virtually assure that. For Alpha, which has a solid thermal core business to help it limp along, that's not the end of the world. However, Walter's heavy reliance on met could turn 2014 into a make or break year.

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  • Report this Comment On May 18, 2014, at 7:09 PM, Mark2013 wrote:

    A year? No way.

    This is a time people are in a panic to sell those stocks which means it is a time for me to continue to buy.

    Now, summer months might be hard sure but there are many variables at play here for fast upside and just two of them are; overstock is about gone and this is a midterm election year where coal loving Republicans look like they will gain seats in the House and even take the Senate and if that happens you guys not holding will have seen ANR go from 3s and 4s to 15 in a day and it will continue up from there. So sad and too bad.

    Other variables too long to list but anyone can find them to see this is the time to buy and sell later when people get greedy. If coal which is rebounding now were to go under, so does the States. The States can still survive without the banks but not without energy and out of the pie coal is the biggest energy provider alone and with natural gas makes up about 67% of US energy and I doubt the nation wishes to be in the dark and out of business in a day so is just silly to not buy imo.

    It's not dumb people fearing to buy or those selling but it is obviously unskilled and inexperienced in the market like is likely the case with the writer of the given article here. I doubt he has been in the markets over 30 years as I have been.

    I will not judge someone based on their youth and inexperience. lol I Remember Reagan saying that in a debate once while I listened live. Paraphrasing his remarks lol

  • Report this Comment On May 20, 2014, at 2:05 PM, gridflash wrote:

    It's had to see an upside with iron ore below $100

  • Report this Comment On June 05, 2014, at 3:14 AM, Matt8265 wrote:

    All true with WLT but ANR is looking better while ACI is still a concern.

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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