Trends Driving Our $1 Price Estimate For Alpha Natural Resources

Alpha Natural Resources (NYSE:ANR) is the largest producer and exported of metallurgical coal in the U.S. as well as a leading producer of thermal coal. In addition to domestic met coal sales, the company exports the commodity to markets in Asia, Europe, South America, and Africa. A deterioration in the market conditions for metallurgical coal has taken its toll on the business prospects of Alpha Natural Resources. We have a new $1 price estimate for Alpha Natural Resources, which reflects the grim situation that the company is currently facing. In this article, we will look at the trends driving Alpha Natural’s business prospects and our valuation of the company’s stock.

See Our Complete Analysis For Alpha Natural Resources

Coal Demand and Prices

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 metallurgical 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. ^[1] Weak Chinese demand for steel has translated into weak demand for metallurgical coal. Going forward, question marks over Chinese economic growth remain, with the IMF lowering its outlook for 2015 growth from 7.1% to 6.8%. ^[2]

Weak demand coupled with an oversupply situation, due to expansion in production by major mining companies, has resulted in a decline in international met coal prices, which has negatively impacted price realizations for Alpha Natural’s metallurgical coal business. Realized prices for Alpha Natural’s metallurgical coal mining business stood at $85.42 per ton in 2014, as compared to $99.01 per ton in 2013. ^[3] Given the prevailing weak demand and oversupply situation, Alpha Natural is expected to face a weak demand and pricing environment for metallurgical coal in 2015 as well.

Pricing for thermal coal has been weak over the course of last year as well, primarily as a result of  soft natural gas prices and weak demand conditions for thermal coal. Due to 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. Realized prices for Alpha Natural’s Eastern Steam Coal business,which produces thermal coal, stood at $57.62 per ton in 2014, as compared to $62.31 per ton in 2013. ^[3] Soft natural gas prices and weak demand conditions for thermal coal are expected to result in weak thermal coal pricing in 2015 as well.

Trefis Price Estimate

We had already factored in most of the weak market conditions for both thermal and met coal in our model for Alpha Natural Resources before our latest price revision. However, in view of the prevailing weakness in international markets, particularly the downward revisions to Chinese economic growth, we have revised down our estimates for shipments and margins for the company’s metallurgical coal division. A significant proportion of the company’s met coal shipments are exported, and weakness in export markets is likely to result in weak shipments in 2015. This has led to a downward revision in our price estimate for Alpha Natural Resources to $1.11. With the prevailing subdued demand and pricing environment for coal expected to persist in the near term, prospects look quite bleak for Alpha Natural Resources. We will be keenly following developments at Alpha Natural Resources.

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1. Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association [↩]
2. World Economic Outlook January Update, IMF [↩]
3. Alpha Natural Resources’ 2014 10-K, SEC [↩] [↩]