James River Coal (NASDAQ: JRCC) shares have fallen from a peak of around $60 a share in mid-2008 to recent lows below $1. After mine closures and debt refinancing, the company is now exploring "strategic alternatives" up to and including the sale of the company. It sounds like James River is throwing in the towel, should investors in struggling miners Walter Energy (WLTGQ) and Arch Coal (NYSE: ACI) be concerned?
The other side of the coin
James River sells thermal and metallurgical coal domestically and abroad. The bulk of its operations are in the Central Appalachia region, which is losing ground to the Illinois coal basin. That helps explain the divergent performance of James River and Alliance Resource Partners (ARLP 1.00%)
While James River has been curtailing its output, Alliance has been increasing its production. And posting year after year of record results—2013 was the company's 13th consecutive year of improvement, as it "set new annual benchmarks for coal sales and production volumes, revenues, net income and EBITDA." With expansion projects set to come online in 2014 and continued basin switching by utility customers, next year is likely to be yet another record year.
James River has been caught in a spiral and has been trying to hold on, hoping that better days will come before the money runs out. This is exactly the scenario that Peabody Energy (BTU) CEO Gregory Boyce described in his company's fourth quarter earnings call: "...you can only have that strategy of losing money and waiting and sitting for so long."
It looks like James River has waited just about as long as it can. It's been bleeding red ink for more than two years, with a second quarter 2013 profit coming from a one-time gain on a debt exchange that traded a lower debt level for higher interest rates. Note that Alliance hasn't lost a penny through coal's malaise and Peabody has been able to push results back into positive territory despite continued market weakness.
But James River isn't alone. While Peabody and Alliance are performing relatively well, miners like Arch Coal and Walter Energy made expensive bets on metallurgical coal at the market peak and are now struggling. Like James River they are playing the waiting game.
Arch and Walter have been posting losses for over a year, shutting mines, refinancing debts, and cutting their dividends. While these are the right moves to deal with a tough coal market, they aren't exactly positive signs for the future if coal markets don't turn around soon.
Of the pair, Walter is probably in worse shape, since it's transformed itself into an almost pure-play met miner. The met market continues to see too much supply despite solid demand, and that trend looks like it won't change until late in 2014 or 2015 at the earliest. For example, mining equipment maker Joy Global (JOY) has warned that its sales suggest that new met mines are still coming online despite the met glut.
Arch, meanwhile, has notable thermal operations in the Powder River Basin (PRB) (about 70% of its sales volume). The PRB is starting to see spot market price increases. That will help provide a floor while the company waits for met markets to recover. And it has been hording cash. That puts Arch in position to pay down its acquisition debts once markets recover, but gives it the liquidity it needs to wait out the downturn. At year end 2013 the company had $1.2 billion in cash and short-term investments.
Healthy, but concerning
James River exploring strategic alternatives is healthy for the coal market, but raises concerns for other struggling miners taking the same wait and see approach. Arch and Walter appear to be in better shape than James River, but continued losses, ill-timed acquisitions, and still weak coal markets could outlast their financial wherewithal. Keep a close eye on them. More conservative investors should probably stick to better performing miners like Alliance and Peabody.