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

There's more pressure ahead for Peabody Energy, Arch Coal, and Alpha Natural Resources as new rules from the Environmental Protection Agency come into play.

Jun 3, 2014 at 3:59PM

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 (NYSE:ANR) 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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Vladimir Zernov 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.

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