Tough Times Ahead For Alpha Natural Resources

One of the leading U.S. coal companies Alpha Natural Resources (NYSE:ANR) faces challenging times ahead. ANR, which has exposure to both the thermal and metallurgical coal markets, has suffered in the recent quarters due to tough conditions in the coal market. The introduction of tougher regulatory restrictions and an oversupply of coal in international markets have adversely affected the price of coal. In the near to medium term, met coal prices are likely to remain low in the face of oversupply, while thermal coal prices could receive a boost as natural gas prices rise and the demand for coal-powered electricity increases. In the face of these challenges, ANR is considering selling off some of its assets in order to maintain a sufficient level of liquidity.

Our current price estimate for ANR is around $5.

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Met Coal Market

At the end of the third quarter of fiscal 2014, the benchmark price for met coal was at $120/tonne, the lowest level in six years. ((Met Coal Benchmark Price, Doyle Trading Consultants)) Any recoveries in met coal prices have been stifled by a weak demand for coal in China and an oversupply of coal from Australian coal companies. What’s more, according to Moody’s estimates, the met coal market is still 30 million tons oversupplied and there might be even more price cuts in the future. ^[1] As a result, most coal producers have responded by cutting production. In the last two years, 40 million tons of production cuts have been observed. American firms, Cliffs Natural Resources(CLF) and ANR responded to weak quarterly benchmark price settlement for 3Q14 by announcing cuts in met coal production. Subsequently, CLF closed its Pinnacle mine, while ANR closed its Cherokee mine. ^[2] Back in February, ANR stated that it would reduce met coal production by 2 million tons and increased that amount by 1.5 million tons in May. This means that Alpha Natural Resources expects to ship only 15 to 18 million tons of metallurgical coal this year versus the 16 to 20 million tons that the company previously guided for. ^[3]

Maintaining Liquidity

Metallurgical coal accounted for nearly 50% of Alpha Natural Resources’ revenues in fiscal 2013. If prices remain low, the company is likely to post losses in the coming quarters. In the face of tough conditions in the met coal market, Alpha Natural Resources has been taking steps to improve its liquidity. The company has been focused on cutting costs and reducing capital expenditures. Further, in Q2F14, ANR issued $500 million worth of senior secured notes with a maturity date of 2020. ^[4] The proceeds of the debt sale will be directed towards the repayment of debt due in the short term. Additionally, the company fixed its credit facility to suspend the interest coverage ratio until the first quarter of fiscal 2016. ^[4] ANR is also considering selling some or all of its stake in its joint venture with Rice Energy, a non-core asset, to add more cash to its coffers. The sale might raise the company as much as $250 million. ANR ended the previous quarter with liquidity of more than $2 billion, including cash equivalents of $1.2 billion. According to UBS analyst Kuni Chen, the company has sufficient liquidity to survive at least three more years of downturn in the coal market. ^[5]

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1. Metallurgical Coal to Stay Cheap for Years, Moody’s Says, Bloomberg, July 2014 [↩]
2. Alpha closing mine near Haysi, 121 workers cut, WCYB.com, June 2014 [↩]
3. UPDATE 1-Walter, Alpha Natural cut steel-making coal shipments forecast, CNBC, May 2014 [↩]
4. Alpha Natural Resources Inc announces pricing of senior secured second lien notes and changes to credit facility, Reuters, May 2014 [↩] [↩]
5. Coal: No ‘Imminent Bankruptcy Risk’ But UBS Discusses Anyway, Barrons Blog, May 2014 [↩]