Alpha Natural Resources’ Earnings Preview: Weak Coal Demand And Pricing To Weigh On Q4 Results

Alpha Natural Resources (NYSE: ANR), one of North America’s largest coal miners, will release its Q4 2014 earnings results and conduct a conference call with analysts on February 12. We expect the prevailing subdued demand and pricing environment for both thermal and metallurgical coal to adversely impact the company’s quarterly results on a year-over-year basis. The impact of weak demand and pricing will be partially offset by the company’s cost rationalization efforts, which will provide some support to its margins. During Q3 2014, the company’s quarterly revenues declined by around 12% year-over-year to $1.1 billion due to lower prices and volumes for both thermal and metallurgical coal. ^[1] However, excluding one-time items, the company’s operating losses narrowed to $159 million in Q3, as compared to  $293 million in the corresponding period a year ago, due to the company’s cost reduction efforts. ^[1] In this article, we will take a look at what to expect from the company’s Q4 results.

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Metallurgical Coal Demand and Pricing

Metallurgical coal is a major input in steelmaking. Thus, demand for metallurgical coal by the steel industry plays a major role in determining its prices. The prices for Alpha Natural’s coal sales are benchmarked to international metallurgical coal prices. International metallurgical coal prices are largely determined by Chinese demand, since China is the largest consumer of metallurgical coal in the world. Demand for the commodity by the Chinese steel making industry has been weak, adding to subdued demand from other major consumers such as Japan and the EU. Chinese steel demand growth is expected to slow to 2.7% in 2015, down from 6.1% and 3% in 2013 and 2014, respectively. ^[2] Weak Chinese demand for steel has translated into weak demand for metallurgical coal. Weak demand, coupled with an oversupply situation due to expansion in production by major mining companies, has resulted in plummeting coal prices. ^[3] This has negatively impacted price realizations for Alpha Natural’s metallurgical coal business. Realized prices for Alpha Natural’s metallurgical coal mining business stood at $86.14 per ton in the first nine months of 2014, as compared to $99.70 per ton in the corresponding period of 2013. ^[1] The company’s metallurgical coal shipments declined 13% to 13.7 million tons in the first nine months of 2014, primarily due to weak demand from Alpha Natural’s export markets and production curtailments by the company. ^[1] The prevailing weak demand and pricing situation for metallurgical coal is expected to weigh on the company’s Q4 results.

Thermal Coal Demand and Pricing

In addition to prices of metallurgical coal, thermal coal prices have also weakened due to an oversupply situation. This is primarily due to the expansion of coal supply by major mining companies, despite weak demand conditions. ^[4] Global demand for the commodity has weakened as a result of weakening demand from China, the world’s largest consumer of thermal coal. As a result of the country’s anti-pollution drive, coal’s share of new generation capacity has dropped to 40% over the past 12 months, from 75% between 2010 and 2012. ^[5] Realized prices for Alpha Natural’s Eastern Steam Coal business,which produces thermal coal, stood at $58.32 per ton in the first nine months of 2014, as compared to $62.51 per ton in the corresponding period of 2013. ^[1] The prevailing weak demand and pricing situation for thermal coal is expected to weigh on the company’s Q4 results.

Cost Reduction

As a result of a weak pricing environment in 2014, Alpha Natural Resources focused on reducing its operating costs in order to boost its profitability. The company’s cost reduction measures resulted in lower labor-related benefits and expenses and lower maintenance costs. In addition, the company curtailed production from some of its higher cost operations. The sum total of Alpha Natural Resources’ cost reduction efforts lowered its cost of coal sales around 11% from $45.86 per ton in the first nine months of 2013 to $40.87 per ton in the first nine months of 2014. ^[1]

The company management hinted at a continuation of its efforts to reduce operating costs and improve operational efficiency during its Q3 earnings conference call. ^[6] These efforts will provide a boost to the company’s results in Q4.

Expectations from Conference Call

The adverse market conditions for coal have taken their toll on Alpha Natural’s liquidity position. The company reported a cash outflow of $253 million from its operations in the first nine months of 2014, as compared to an inflow of $178 million in the corresponding period of 2013. ^[1] In response, the company has idled some of its high-cost operations as well as sold off some of its coal mining assets. Given the prevailing weak market conditions for coal, the management is expected to outline its plan to bolster its liquidity position. There may be more asset sales or idling of coal mines on the horizon. Further clarity in this regard will throw some light on the road ahead for Alpha Natural Resources.

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1. Alpha Natural Resources’ Q3 2014 10-Q, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association [↩]
3. Coking coal price crashes through $100, Mining.com [↩]
4. Australian coal industry caught in ‘perfect storm’, Financial Times [↩]
5. Thermal coal falls victim to China’s energy policy, Financial Times [↩]
6. Alpha Natural Resources’ Q3 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]