Alpha Natural Resources (NASDAQOTH:ANRZQ) and Walter Energy (NASDAQOTH:WLTGQ) have suffered the same fate so far this year: Shares of both companies are under tremendous pressure. Both miners produce met coal, carry loads of debt, and struggle to get good refinancing rates. However, there are some major differences, and those differences could play a major role in their future.
Alpha Natural Resources is not a pure met coal bet at all
Lately, disappointing news concerning met coal has had almost the same effect on Alpha Natural Resources as on Walter Energy. However, Alpha Natural Resources also produces thermal coal. Last year, its revenue was equally split between thermal coal and met coal. This year, given the fact that the thermal coal market is in a better shape than the met coal market, thermal coal's share in Alpha Natural Resources revenue will likely increase.
The market is nervous about all coal-related news, which is understandable given the coal miners' share price performances. This explains why Walter Energy recently released a comment on the new EPA rules on carbon emissions, highlighting the fact that it produced met coal and would not be affected by these rules. Despite this effort, Walter Energy's shares were punished on the day of the news, along with the likes of Alpha Natural Resources and Arch Coal (NASDAQOTH:ACIIQ).
Arch Coal investors should be more concerned about the EPA rules, since the company is focused on thermal coal production. Although the market seems to ignore such differences in the near term, they will play a key role in valuations in the long term.
Alpha Natural Resources' refinancing is cheaper
Both Alpha Natural Resources and Walter Energy made ill-timed acquisitions at the beginning of this decade, and now they are paying the price for these moves. At the end of the first quarter, Alpha Natural Resources' debt stood at $3.4 billion while Walter Energy's debt was $2.9 billion. In current conditions, both companies can't pay off their debt from cash flows, so they have to refinance it.
This May, Alpha Natural Resources issued $500 million 7.50% secured second lien notes due in 2020. Second lien debt is subordinate to other notes issued by the company. Walter Energy has also used second lien notes this year, issuing $350 million of 11%/12% toggle notes due in 2020. Toggle notes offer the option to miss an interest payment in exchange for a higher interest rate in the future, which is 12% in this case.
In comparison with Walter Energy, Alpha Natural Resources got a better deal. The company's liquidity situation is easier than Walter Energy's, and its thermal coal business brings the much-needed diversification from met coal exposure.
Walter Energy is more sensitive to short-term price swings
No matter how brutal the price swings will be in thermal and met coal this year, Alpha Natural Resources will not feel them... at least in 2014. The company has committed and priced the lion's share of its 2014 production, meaning that its cash flows are protected from further price downside this year.
Walter Energy's pricing is mostly based on three-month contracts, however. This will be good when met coal prices rebound, as Walter Energy's cash flows will see an almost immediate boost. However, the news from met coal price front are not encouraging, which puts further pressure on Walter Energy's shares.
Walter Energy remains a very risky bet on a met coal rebound. In Alpha Natural Resources case, the risk is almost evenly spread between met coal and thermal coal markets, which offers a little bit more protection.