Please ensure Javascript is enabled for purposes of website accessibility

Tough Year Ahead for This Coal Miner

By Vladimir Zernov - Feb 14, 2014 at 9:07AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Alpha Natural Resources struggles from low pricing, and unfortunately the losses are likely to continue.

Life for met coal miners like Alpha Natural Resources (NYSE: ANR) and Walter Energy (WLTGQ) isn't getting any easier. Alpha Natural Resources' latest quarterly report confirmed the weakness on the met coal side, which was already mentioned in reports by thermal coal-heavy producers like Arch Coal (NYSE: ACI) and Peabody Energy (BTU).

Pricing is weak
Alpha Natural Resources stated that the trend of declining met coal spot prices continued in 2014. The company blames supply growth in Australia, partially fueled by the weak Australian dollar, and significant Chinese inventory levels for the continuing pressure on prices.

Alpha Natural Resources has already committed and priced a significant share of its 2014 production. For example, 76% of its Appalachian steam coal production is committed at $58.88 per ton. In comparison, Arch Coal's Appalachian steam coal contracts stood at $57.07. Alpha Natural Resources expects that cost of sales for Appalachian steam coal will be in the range of $64-$70 per ton, which means that the company will be losing money on each ton sold.

The company expressed cautious optimism about met coal pricing, stating that total met coal exports in 2014 were estimated to increase by only about 10 million tons, 6 millions of which would come from Australia. Last year, Australia raised its exports by 24 million tons. However, I don't share the optimism, as coal producers around the world hesitate to cut their production levels.

Some of them, like Peabody Energy, are even profitable at current prices, although the margins are very thin. However, most producers are afraid to lose customers and plan to weather the storm. Everyone waits for others to cut production. As a result, the problem of oversupply remains.

Buying time
Alpha Natural Resources has bought itself some time with the help of a series of note offerings. The company stated that it reduced its outstanding convertible notes maturing in 2015 from $824 million to $194 million during 2013.

This move eases the short-term pain for the company. However, the debt gets pricier as problems in coal markets continue. As a result, Alpha Natural Resources expects to spend $240 million-$255 million on interest expense in 2014. It's worth noticing that operational cash flow turned negative in the fourth quarter. Given the spot prices and the prices of the company's contracts, losses will continue.

The situation is more drastic for Walter Energy, which amassed its $2.8 billion debt to finance the acquisition of Western Coal back in 2011. Now, the situation is getting tough for the company, and it could be forced to sell these assets. Of course, such a sale would come at a big discount to the $3.3 billion that Walter Energy once paid for Western Coal. In comparison, Walter Energy's current market capitalization is just above $700 million.

Bottom line
Alpha Natural Resources' main problem is its serious exposure to met coal prices. Unlike thermal coal prices, which remain stable yet low, met coal prices continue to decline. As of now, it is difficult to find a catalyst to reverse this trend in the short term.

However, the company still has significant liquidity to wait for price improvements. This puts it in a superior position to Walter Energy, for which time could be running out. All in all, the weakness in pricing will continue to pressure Alpha Natural Resources shares.


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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Peabody Energy Corporation Stock Quote
Peabody Energy Corporation
Walter Energy, Inc. Stock Quote
Walter Energy, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.