Who's Winning the Met Coal Waiting Game?

While all met coal producers are short term losers, cost-effective ones have good chances to profit in the longer term.

Jun 24, 2014 at 8:42AM

Back in 2011, met coal producers were very optimistic. Prices were rising as demand ramped up, and miners were growing their production levels. Walter Energy (NASDAQOTH:WLTGQ) and Alpha Natural Resources (NYSE:ANR) took loads of debt to finance the acquisitions of Western Coal and Massey Energy, while BHP Billiton (NYSE:BHP) approved three met coal projects.

Since then, the situation has changed dramatically. Met coal prices suffered a severe downside as new supply flooded the market while demand failed to increase to the desired level. During the downturn, producers took a wait-and-see approach and were reluctant to cut production, hoping that the pricing environment will soon change to the better. That did not happen, and the downturn has drawn a fine line between the strongest and the weakest.

Admitting mistakes
It took a long time before Walter Energy finally admitted that the cost level at its Canadian operations was unsustainable. The company has decided to idle them, but that happened just this April. This hesitation could prove costly for Walter Energy, especially as its stock has been under extreme pressure this year. The company has forced itself into a corner and has to take drastic measures to stay afloat. Walter Energy had to agree to high interest rates when refinancing a part of its existing debt while cutting its capital spending to sustaining levels. The good part of the story is that this year's actions and capital scrutiny provide the company with room for maneuver.

Alpha Natural Resources was also slow to admit the met coal world has changed. The fact that the company produces lower-quality coal than Walter Energy adds to the pressure on its bottom line, because lower-quality met coal pricing suffered most. However, Alpha Natural Resources' debt situation is easier. The company's production has basically already been sold off for this year, making the outlook for Alpha Natural Resources relatively stable.

Costs are paramount
Cost leaders like BHP Billiton and Teck Resources (NYSE:TCK) are in a better position. However, they cannot ignore lower prices. Teck Resources' first-quarter earnings fell by almost 80% compared to the first quarter of last year, and met coal was a major contributor to this decline. In its most recent earnings call, Teck Resources admitted that it had absolutely no plans to cut met coal production. Instead, the company was waiting for others to pull their production from the market.

BHP Billiton's tactics are the same. The company is committed to simplifying its portfolio, and met coal will remain one of the main pillars for BHP Billiton. It's the non-core assets whose fate is to be divested. For example, the company stated that it was reviewing options for its Nickel West business in Australia. This announcement came at a time when nickel prices were enjoying a bull market, so the company is serious about sticking to its main products while selling other businesses.

Bottom line
So what's the result of the met coal waiting game? In the short term, all met coal producers are losers as low prices eat into their profits. In the longer term, cost-effective producers like BHP Billiton and Teck Resources could enjoy a bigger market share and less competition as weaker players will be cutting production or leaving the market.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers