Alpha Natural Resources’ Earnings Review: Weak Coal Demand And Pricing Weigh On Q1 Results

Alpha Natural Resources (NYSE:ANR) released its Q1 2015 results and conducted a conference call with analysts on April 30. 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 one-time items, stood at a loss of $34 million in Q4 2014, as compared to a profit of $289 million in the corresponding period a year ago. ^[1] Alpha’s Q1 2015 revenues stood at $0.8 billion, as compared to $1.1 billion in the corresponding period a year ago. ^[1] Despite a 7% increase in shipments, the company’s revenues from its coal mining operations declined to $726 million in Q1 2015 from $953 million in Q1 2014, as a result of a fall in both shipments and 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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Weak Metallurgical Coal Market Conditions

Alpha’s metallurgical coal business continued to face weak market conditions in Q1. Realized prices for the division fell nearly 15% year-over-year to $76.75 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. Weakness in market conditions was also reflected in a reduction in the company’s met coal shipments, which fell 9% year-over-year to 4 million tons. Thus, weak market conditions for metallurgical coal have dampened the company’s Q1 results.

Subdued Thermal Coal Market Conditions

Alpha Natural Resources’ thermal coal business was negatively impacted by adverse market conditions for the commodity. With the ongoing 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 have negatively impacted the company’s thermal coal mining operations. The shipments of the company’s Eastern Thermal Coal operations fell 28% on a year-over-year basis to 5.5 million tons. Realized prices declined 5% year-over-year to $55.20 per ton for the Eastern Thermal Coal operations. ^[1] Thus, weak market conditions for thermal coal have dampened the company’s Q1 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 9% from $41.27 per ton in Q1 2014 to $37.65 per ton in Q1 2015. ^[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 average cost of coal sales of $58-64 per ton for the company’s Eastern coal mining operations. ^[3] This is comparable to the company’s figure for 2014, which stood at $61.66 per ton. ^[4] 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’ Q1 2015 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩]
2. Coking coal price crashes through $100, Mining.com [↩]
3. Alpha Natural Resources Q1 2015 Earnings Call Transcript, Seeking Alpha [↩]
4. Alpha Natural Resources’ Q1 2015 Earnings Release, SEC [↩]