Troubled met coal miner Walter Energy (OTC:WLTGQ) recently reported its fourth quarter results. The company's situation is tense, and investors were waiting for clues that Walter Energy is moving in the right direction. However, the report showed few improvements, and the company's future remains uncertain.
Low met coal prices and high interest expense weigh on earnings
The major achievement that Walter Energy can be happy with is the positive operational cash flow in the fourth quarter. Quarterly operational cash flow numbers were negative in three quarters out of four in 2013. However, $19.6 million of cash from operations is not enough to take the bottom line above the water.
Walter Energy accumulated $2.8 billion of debt, and this debt weighs heavily on its earnings through interest expense, which totaled $64.6 million in the fourth quarter. The company expects that interest expense will be around $220 million on a cash basis in 2014.
The met coal market remains oversupplied, and this fact weighs on prices. What's more, Walter Energy sees increased pressure from customers to get a decent discount from benchmark met coal prices. As a result of this, the company decided not to participate in certain deals.
A weak Australian dollar continues to encourage met coal production from the country. BHP Billiton (NYSE:BHP), which increased met coal production by 22% in the last half year, has more projects in the pipeline. This year BHP Billiton plans to finish the construction of the Caval Ridge mine in Australia, which will produce an initial 5.5 million tons per annum of met coal. BHP is also working to increase its Hay Point port capacity from 44 million tons per annum to 55 million tons per annum, signaling more exports will come from the country.
Delays in asset sales raise liquidity questions
In an attempt to build a safety cushion, Walter Energy targeted $250 million of asset sales. During the fourth quarter earnings call, the company stated that the timing to reach targeted proceeds was affected by the current met coal market situation. This means that Walter Energy is more likely to finish the sales in the second half of the year rather than in the first half of the year.
The company finished the year with $260.8 million of cash on the balance sheet and $326.5 million available under the revolving credit facility. Given the current met coal pricing, we can assume that Walter Energy will be more or less flat on the operational cash flow side.
At the same time, the company announced that capital spending will be around $150 million in 2014, in line with the previous year. As cash from operations is unlikely to contribute something significant to the bottom line, capital spending will have to be funded from elsewhere.
As cash from asset sales is probably delayed, Walter Energy can once more turn to the debt market. Despite the tough met coal market, the debt market is still giving miners the opportunity to raise capital. Alpha Natural Resources (NYSE: ANR) was able to sell $300 million of 4.875% convertible senior notes due 2020 back in December. Yes, the fact that notes are convertible means possible dilution for Alpha Natural's shareholders, but at least the company got the capital it needed.
Several positive factors could help
On the positive side, Walter Energy stated that it expects to realize 500,000 – 600,000 tons from its 2.2 million inventories. This means that numbers on the balance sheet will translate into real cash. A weaker Canadian dollar might also help.
Walter Energy's Canadian operations underperform its U.S. operations on a cost basis. The cash cost of sales was $93.63 per ton in the U.S. segment in the fourth quarter, while it was $132.55 in the Canadian segment of Walter Energy's operations. The company stated that 70% of costs in Canada are costs denominated in Canadian dollars. Every 0.01 favorable change in the Canadian dollar exchange rate is translated into almost $600,000 of lower costs.
Inventory sales and Canadian dollar weakness could provide some support, but they do not change the big picture for Walter Energy. The company is in a difficult situation and is likely to remain pressured by the market.