Why Long-Term Fundamentals Don't Matter for These Coal Miners Right Now

Walter Energy and Alpha Natural Resources are in a tough situation, so the near-term dynamics of coal prices matter more than long-term prospects for the time being.

Vladimir Zernov
Vladimir Zernov
Apr 3, 2014 at 9:48AM
Energy, Materials, and Utilities

BHP Billiton's (NYSE:BHP) coal segment president Dean Dalla Valle recently stated that oversupply is likely to pressure coal prices for some time. Meanwhile, he is optimistic about the future of coal, as demand will continue to grow over the years. However, there's little relief in his words for coal miners like Walter Energy (NASDAQOTH:WLTGQ) and Alpha Natural Resources (NASDAQOTH:ANRZQ), as they need improvements on the pricing side as soon as possible.

Cash slipping away from Walter Energy
Walter Energy is burning cash quarter after quarter. The company had negative operating cash flow of $27 million last year. Walter Energy cut its 2014 capital expenditures to $150 million, but it still had to finance it through debt. At current met coal prices Walter Energy is unable to finance its capital spending needs from its operational cash flow.

Meanwhile, financing through debt becomes increasingly expensive for the company. The company recently obtained $550 million from the debt market, but the rates were extremely high. In its annual report, Walter Energy states that its cash obligations total $407 million this year. This means that the company can get through this year with the cash that it received through debt.

However, Walter Energy is likely to return to the debt market as soon as 2015. What will the rates look like for the company at that time? A lot will depend on the level of met coal prices. If they stay where they are now, the rates will likely increase even more. If they continue to decline, Walter Energy could face a situation when the debt market will be shut for the company.

Alpha Natural Resources also needs a better price environment
Alpha Natural Resources' situation is a bit easier. The company's revenues were evenly divided between met coal and thermal coal last year. Less exposure to met coal puts Alpha Natural Resources in a better position, as thermal coal prices suffered less downside than met coal prices. However, there are warning signs.

The company swung to negative operating cash flow in the fourth quarter. The debt schedule of Alpha Natural Resources is easier than Walter Energy's, but the debt burden remains high at $3.4 billion. The company's capital spending will likely exceed its operating cash flow. Alpha Natural Resources had $620 million of cash on the balance sheet at the end of the year, so the company has a sufficient liquidity cushion for some time.

Even though Alpha Natural Resources is in better shape than Walter Energy, it still needs fast improvements on the coal pricing side. So far, the downside in prices outpaced Alpha Natural Resources' cost-cutting efforts. If this continues in the future, shares of the company will experience more pressure.

Bottom line
Sometimes short-term dynamics are more important than long-term prospects. Right now this is the case for both Walter Energy and Alpha Natural Resources. There is no use in thinking about where coal prices will be five years from now, because at first these companies have to get there. Walter Energy is in a more vulnerable position, as heavy debt and lack of positive operational cash flow endangers its business.