Earnings Preview: Falling Met Coal Consumption Likely To Impact Alpha Natural Resources’ Topline

Alpha Natural Resources (NYSE: ANR), one of North America’s largest coal miners, is expected to publish its Q2 2014 earnings on August 6. We expect the company’s losses to widen (on a year-over-year basis) owing to lower met coal pricing, though this could be partially offset by the possibility of better demand for the company’s thermal coal in the United States. During Q1 2014, the company’s quarterly revenues declined by around 17% year-over-year to $1.1 billion due to lower prices and volumes for both thermal and metallurgical coal, but net losses narrowed to around $55.7 million from about $110 million a year ago, owing to a one-time gain on asset sales as well as better cost management. ^[1] Below we take a look at what to expect from the company’s business for this quarter.

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Trefis will be revisiting its $5 price estimate for Alpha Natural Resources following the earnings release.

Thermal Coal Outlook Optimistic

Thermal coal demand is largely driven by the electricity generation sector, which accounts for a bulk of thermal coal consumption. Thermal coal consumption in the U.S. has been on the uptrend of late, as companies have been burning more coal in response to rising natural gas prices. Gas prices were generally at levels around $4.50 per million British thermal units (MMBtu) over the first quarter, which is almost 30% above last year’s prices.

Alpha’s thermal coal business saw its volumes and pricing decline slightly in the first quarter. Powder river basin coal shipments fell by around 5% year-over-year to around 9.45 million tons, while Eastern thermal volumes fell by 4% to $7.58 million tons. Pricing for Eastern thermal coal declined by about 6% to $58.25, while prices for PRB coal declined 6% to $12.26 per ton. Although thermal coal consumption has actually been trending upwards in the United States on the back of higher natural gas prices and colder weather, utility companies have been drawing down from their inventories faster than they have been replenishing them, partly due to rail and barge disruptions. For instance, as of February – the most recent data available – coal inventories had decreased 32.2% year-over-year, bringing total U.S. coal stocks in the electric power sector to their lowest levels since March 2006. ^[2] However, the outlook is promising, since utility companies will need to replenish their coal inventories going forward. Alpha has indicated that it was seeing increasing RFP (request for proposal) activity in the thermal coal space, and this could give rise to more contracts and possibly better pricing. The company narrowed the range for its thermal coal shipments guidance for 2014 to 26 to 30 million tons, from a previous estimate of 24 to 30 million tons.

Metallurgical Coal Continues To Struggle

In the first quarter, Alpha’s metallurgical coal business remained lackluster, with volumes falling by around 13% year-over-year to about 7.58 million tons, while price realizations dropped 13% to around $90 per ton. The global seaborne met coal markets continue to see oversupply due to a seasonal slowdown in Chinese iron production, higher coking coal production in Australia as well as weaker exchange rates in many producing countries, which have helped miners lower their dollar costs of sales. Alpha expects the met coal markets to remain oversupplied through 2014, but expects to see better supply-demand balance in 2015, as many of the suppliers in the seaborne coal market are believed to be operating with negative cash flows, which would be unsustainable. The company indicated that large miners in markets such as Australia, Canada and the U.S. have been scaling back on supplies. ^[3] The company has cut its guidance for met coal volumes for 2014 to 15  to 18 million tons, down from its previous guidance of around 16 to 20 million tons.

Costs Could Improve

We will be watching for improvements on the cost front as well. During 2013, the company reported average costs of around $71.40 per ton for its Eastern coal operations, which includes both metallurgical coal and Eastern steam coal. This was partly due to some downtime at one of the company’s longwall mines. However, the company expects the adjusted cost of coal sales to stand at around $64 to $70 per ton for this year.  The savings could be realized through better operating and overhead costs (which ANR expects to cut by roughly $200 million this year), ^[4] as well as due to the fact that the company has been curtailing production of some higher cost thermal coal varieties such as Central Appalachian coals.

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1. Alpha Natural Resources Q1 2014 Earnings Press Release, Alpha Natural Resources, May 2014 [↩]
2. Electricity Monthly Update, U.S. EIA [↩]
3. Alpha Natural Resources Q1 2014 Earnings Call Transcript, Seeking Alpha, May 2014 [↩]
4. Alpha Natural Resources Q4 2013 Earnings Call Transcript, Seeking Alpha, February 2014 [↩]