ANR Has A Tough Quarter On Declining Met Coal Prices

Alpha Natural Resources (NYSE:ANR) released its first quarter results on Thursday, posting a relatively weak set of numbers due to lower metallurgical coal prices and declining thermal coal shipments. Revenues for the quarter were down by around 32% year-over-year to $1.33 billion while operating losses widened to $130 million from $29 million in the same quarter last year. ^[1] Overall, we believe that the near-term outlook for the company remains quite challenging given the headwinds in the global met coal market and the U.S. thermal coal market although cost improvements could help to soften their impact on margins. Here are some important takeaways from the company’s earnings release.

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Thermal Coal Shipments Slow Despite Falling Gas Prices

Natural gas prices have risen by more than 20% since January to around $4 per mmBtu. While this has brought about some switching from gas towards coal, it didn’t help ANR’s results since U.S. utility companies continued to consume out of their inventory. Coal inventories in the U.S. declined from their 2012 peak of 214 million tons to around 174 million tons in March 2013. Overall thermal coal shipments (both Powder River Basin and Eastern) fell by around 24% year-over-year to 18 million tons. Things remained quite challenging on the pricing front as well – realized prices for Eastern thermal coal  fell by around 9% year-over-year to around $62 while prices for Powder River Basin coal remained flat at around $13. (Related Read: Higher Natural Gas Prices Are No Boon For ANR’s Thermal Coal Business)

If U.S. natural gas prices continue their uptick, this could help improve demand as utilities consume more thermal coal for electricity generation. However, since many coal producers (especially in the Powder River Basin) are currently operating at significantly below their production capacity, it is quite uncertain as to what effect this would have on pricing. ^[2]

For 2013, ANR expects Eastern thermal coal shipments at 27-31 million tons (at least 24% lower than last year) while Powder River Basin coal shipments are projected at 37-40 million tons, which is around 14% lower than the last year’s number. If thermal coal prices were to rise, ANR may not be able to see any upside since it has committed nearly all of its estimated production for the year at prices similar to those in the first quarter.

Given the weak overall pricing and volume environment, the firm has been focusing on cost cutting to support margins. Weighted average production costs for coal have fallen by around 12% since the last year as ANR has been eliminating some of its higher cost thermal coal production as well as scaling back on production from the Powder River Basin.

Met Coal Pricing Remains Tough

The firm’s realized prices for met coal dropped to $103 per ton in Q1 from around $145 a year earlier although shipments witnessed some modest growth. Met coal typically accounts for more than half of ANR’s coal revenues and the pricing decline has been the key factor weighing down company-wide margins. Prices have been under pressure for some time now due to lower seaborne demand from China (which accounts for around 60% of global blast furnace steel production) as well as due to lower steel production in Europe.

Met coal demand is largely cyclical, and the firm believes that demand could be bottoming out soon. While steel production in China is expected to grow by around 4% to 5% this year, the key catalysts to higher prices is likely to be an uptick in Chinese imports. However, even if there is a meaningful increase in pricing, ANR is unlikely to see much upside since ANR has has committed around 73% of its anticipated met coal production for the year at $104 per ton. The firm has projected met coal shipments at 19-22 million tons.

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1. ANR Press Release [↩]
2. Seeking Alpha [↩]