Alpha Natural Resources’ Earnings Review: Weak Coal Demand And Pricing Weighs On Q4 Results

Alpha Natural Resources (NYSE:ANR) released its Q4 2014 results on February 12. As expected, the weak coal demand and pricing environment negatively impacted the company’s results, partially offset by its ongoing cost rationalization efforts. The company’s adjusted EBITDA, excluding the impact of gains from asset disposals, stood at $43 million in Q4 2014, as compared to $53 million in the corresponding period a year ago. ^[1] Alpha’s Q4 2014 revenues stood at $1.1 billion, flat as compared to the corresponding period a year ago. ^[1] Despite a 7% increase in shipments, the company’s revenues from its coal mining operations declined to $932 million in Q4 2014 from $966 million in Q4 2013, due to a fall in realized prices. ^[1] The company continues to face challenging market conditions and has been focusing on reducing its operating costs and improving its liquidity position, in order to operate more competitively in a subdued coal pricing environment.

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Improvements In Metallurgical Coal Business

Alpha’s metallurgical coal business continued to face weak market conditions in Q4. Realized prices for the division fell nearly 14% year-over-year to $83.43 per ton. ^[1] This was primarily as a result of weak global demand and oversupplied seaborne metallurgical coal markets, as a result of a sharp rise in Australian metallurgical coal exports. ^[2] Oversupplied metallurgical coal markets have negatively impacted pricing for the metallurgical coal division. However, global production cuts in response to weak demand and pricing have resulted in a more balanced demand-supply situation. This is reflected in the company’s Q4 2014 results, in which metallurgical coal shipment volumes rose 11% year-over-year to 4.9 million tons. Going forward, the company expects metallurgical coal price realizations in 2015 to hold steady close to its Q4 2014 levels at $82.88 per ton. ^[1] However, this is slightly lower than the company’s average realized price of $85.42 per ton for its metallurgical coal shipments in 2014. ^[1]

Thermal Prices Fail To Support Outlook

Alpha’s thermal coal shipments rose sharply on a year-over-year basis in Q4, driven by restocking of coal inventory by utilities, which stood at record low levels a few months ago. Utility inventory levels at the end of September 2014 stood at approximately 45 days of coal burn, compared to a five-year average of approximately 65 days. ^[3] Powder River Basin (PRB) coal shipments rose by around 5% year-over-year to around 9.8 million tons, while Eastern Steam coal shipments volumes rose 6% to 4.9 million tons. ^[1] Alpha’s thermal coal business continued to face a challenging pricing environment in Q4 2014. Realized prices declined 10% year-over-year to $55.47 per ton for its Eastern thermal coal operations, whereas realized prices declined around 4% to $12.02 per ton for the PRB shipments. ^[1] Pricing for thermal coal has been weak over the course of 2014 primarily as a result of  soft natural gas prices and weak demand conditions for thermal coal. With the weakness in natural gas prices and increasingly strict EPA regulations pertaining to coal-fired thermal power plants, utilities have been shifting to natural gas as their preferred fuel, undermining the demand for coal. Soft natural gas prices and weak demand conditions for thermal coal are expected to result in weak thermal coal pricing in 2015 as well. The company expects realized prices for its Eastern Steam coal mining operations to fall to $55.62 per ton in 2015, as compared to $57.62 per ton in 2014. ^[1]

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 $41.28 per ton in Q4 2013 to $36.84 per ton in Q4 2014. ^[1]

The company’s management announced that it would continue with its cost reduction initiatives in 2015. A combination of reduction in selling, general, and administrative expenses and mine support, and overhead reductions, is expected to result in an adjusted cost of coal sales of $58-64 per ton for the company’s Eastern coal mining operations. ^[4] This is comparable to the company’s figure for 2014, which stood at $61.66 per ton. ^[1] We feel that the management is considering the right steps to enable the company to operate more competitively in a subdued coal pricing environment. Given that coal pricing is unlikely to improve significantly in the near term, these steps will better equip the company to face the challenges of 2015.

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1. Alpha Natural Resources’ Q4 2014 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. Coking coal price crashes through $100, Mining.com [↩]
3. Alpha Natural Resources’ Q3 2014 Earnings Release, SEC [↩]
4. Alpha Natural Resources Q4 Earnings Call Transcript, Seeking Alpha [↩]