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Is the EPA's Proposal a Deathblow for Coal Miners?

As if there weren't enough problems for coal miners, the EPA has unveiled plans to cut carbon dioxide emissions 30% by 2030 from 2005 levels. This is a major threat for coal's position in the total energy mix. Currently, coal has the leading share in electricity generation. However, as utilities adapt to the new rules, natural gas will take the mantle.

Walter Energy has multiple problems, but not this one
Oddly enough, the most punished coal miner on the day of the announcement of new rules was Walter Energy (NASDAQOTH: WLTGQ  ) . This makes little sense, as Walter Energy is a pure met coal play that exports the absolute majority of its coal. Thus, the decrease of coal-fired plants does not impact Walter Energy's business.

The company, whose stock is under tremendous pressure this year, issued a statement regarding the absence of impact of the new rules for Walter Energy. However, this statement seemed to produce no results as the situation around Walter Energy is precarious, and some investors react to any coal-related news without digging into it.

Difficult decisions ahead for coal miners
Apart from Walter Energy, other coal miners have reason to worry about the consequences of new regulations. While most companies remained silent on the day of the announcement, Peabody Energy (NYSE: BTU  ) issued a very critical statement regarding the new rules. Peabody Energy stated that the new policy will do harm to poor people and small businesses by lifting their energy bills. Instead, Peabody Energy proposed to focus on efficiency improvements at existing plants and research toward text-generation coal technologies.

There's little chance that Peabody Energy's arguments will be taken into account. Thus, thermal coal producers like Peabody Energy, Arch Coal (NYSE: ACI  ) and Alpha Natural Resources (NASDAQOTH: ANRZQ  ) have to prepare for the new rules. Alpha Natural Resources is in the worst position, as the company also produces met coal. Alpha Natural Resources' revenue was equally split between met coal and thermal coal in 2013. Thus, the company is equally sensitive to pressure on both fronts.

Importantly, the impact of new rules is long-term in nature. Miners will have some time to adapt to the new order. Time is valuable for coal miners who are burning cash like Arch Coal. The company had negative operating cash flow for two quarters in a row. The same is true for Alpha Natural Resources. There will be no immediate effect on thermal coal pricing because of the new rules, and it gives miners some room to breathe.

In the long run, the only way to diminish the impact of the shrinking number of coal-fired plants is to increase exports. However, seaborne coal pricing is very soft right now. The competition from cheap Australian coal is enormous. In addition, China, which is a main consumer of coal, also has plans to cut carbon emissions.

Bottom line
Coal miners have a difficult puzzle to solve. Going forward, they will have to find new customers elsewhere if they want to maintain current production levels. However, most coal miners have problems that require immediate attention, like cutting costs in order to offset a low price environment. I think that this year focusing on producing positive cash flow will take center stage; dealing with government regulation issues will come later.

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  • Report this Comment On June 04, 2014, at 7:10 PM, markstomarks wrote:

    Of course not. If coal goes so goes the nation the same day because coal is now, has been and will continue to be the NUMBER ONE energy provider in the USA. Take a look at your energy pie graph to see that fact and combine natural gas and you have about 70% of US energy and this is not counting the big exports to come in the future to other nations.

    Really, to think coal is going away is insane because the US would go bankrupt, the lights would be out, hospitals and all jobs closed that very day.

    Good luck all. I will be holding and adding shares ANR.

    JMO other than factual things per energy in US

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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