Plummeting met-coal prices have sent shares of Alpha Natural Resources (NASDAQOTH:ANRZQ) to multi-year lows. Although the shares have rebounded a bit from the lows seen in early June, the company still trades at a massive 80% discount to its book value. Is this a signal that the company is a screaming buy?
Book value does not represent sale value
In the current environment, coal producers could be forced to sell some of their assets. So far, producers have limited themselves to idling their underperforming mines. The biggest move so far was made by Walter Energy (NASDAQOTH:WLTGQ), which decided to idle its Canadian operations back in April. Alpha Natural Resources and Arch Coal (NASDAQOTH:ACIIQ) have made smaller moves to optimize their portfolios, while Peabody Energy (NYSE:BTU) has yet to take steps on this front.
Importantly, idled mines bring costs to coal producers. The cost of idling is of course much less than the cost of running an uneconomical operation, but it still eats the much needed cash. However, if we imagine that all idled mines appear on the market for sale at one time, the pricing of these mines would be disastrous. That said, there's little valuable information in book value for coal miners in the current conditions. Liquidity, debt schedules, and costs are factors that are more important.
Liquidity is crucial
None of the above mentioned miners avoided pricey and value-destructive acquisitions in 2011, when met-coal prices were at their peak. This resulted in elevated debt levels and the necessity to put liquidity concerns above all other needs. Perhaps, the least disastrous move was Peabody's purchase of Macarthur Coal. The quality of the purchased assets has enabled Peabody Energy to stay profitable for a prolonged period of time during the met-coal downturn. However, the company swung to a loss in the first quarter and is projected to stay in the red zone this year.
When coal miners were on an acquisition spree, Alpha Natural Resources defeated Arch Coal and purchased Massey Energy for $7.1 billion in shares and cash. The consequences of this ill-timed deal were long-lasting, and Alpha Natural Resources had almost $3.4 billion of debt at the end of the first quarter. The debt is expensive to service, and the company estimated that this year's interest expense would be $240 million-$255 million. Interestingly, the amount of interest expense is similar to Alpha Natural Resources' planned capital spending of $250 million-$300 million.
With $927 million of cash and short-term investments at the end of the first quarter, Alpha Natural Resources can afford a number of cash-burning quarters. The company has already scored two straight negative operating cash flow quarters. One can expect this trend to continue, as Alpha Natural Resources has already committed and priced most of its production this year.
Met coal is the segment that had some uncommitted production. But met-coal prices remain under pressure, and there's no improvement on this front. However, even if Alpha Natural Resources does not return to positive operating cash flow, its liquidity is solid enough to speak of a company as a going concern in the next few years.
Alpha Natural Resources will likely take more aggressive steps in dealing with its portfolio. The company has sufficient liquidity, but negative operating cash flow is unacceptable. Although the book value does not reflect the amount of money that could be received by selling the company's assets, Alpha Natural Resources will be cheap if the company optimizes its production portfolio.