Alpha Natural Shifts Strategy And Closes Eight Mines

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Alpha Natural Resources

Alpha Natural Resources (NYSE:ANR) is closing eight coal mines (mostly thermal coal) in Virginia, West Virginia and Pennsylvania, while laying-off 1200 miners or nearly one-tenth of its workforce. The company’s latest move comes in the wake of a continuous decline in domestic coal demand and prices following stricter environmental regulations and low natural gas prices. The company will also be shifting its production focus from thermal coal to metallurgical (met) coal. [1] Below we take a look at the changes.

We have a price estimate of $9 for Alpha Natural Resources, implying a 30% upside to the current market price. We will soon update our model to reflect the recent developments. The stock price has been extremely volatile lately and fell more than 25% in the last week as concerns grew over the U.S. business.

See Full Analysis for Alpha Natural Resources Here

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Currently, the majority of thermal coal produced by Alpha Natural is used in electricity generation in the U.S. while very little is exported. Thermal coal demand in the U.S. is declining as natural gas has become a preferred alternative. Coal, which was considered an essential commodity for power generation in the U.S. a decade ago, is grappling with utility companies’ preference for cleaner and cheaper natural gas. Low natural gas prices have dragged down coal prices and shipments, which have consequently rendered many mines economically unattractive.

Thermal coal demand and prices were expected to pick-up following an increase in natural gas prices. While natural gas is off of its previous lows, coal demand and prices have not picked up as utility companies are reluctant to move to coal for the time being. The closure of these mines will reduce the company’s total annual coal output by approximately 16 million tons by early 2013, which consequently will impact revenues. Further, the company may have to cough up substantial severance packages. The stock may have reacted negatively due to these factors.

Focus On Met Coal

The company has reiterated its focus on met coal going forward. A steady decline in thermal coal demand and an expected increase in met coal demand have led the company to take these steps. Further, met coal sells at a premium to thermal/utility coal. Therefore, margins and profits are higher than those of thermal coal.

We expect demand for met coal to increase in the future driven by infrastructure growth in China and India. Both countries have recently taken measures to boost their slowing growth. China’s economic planning agency has recently approved several major infrastructure projects including 25 subway projects, 13 road construction projects, five port projects and two waterway projects. Analysts have estimated the cost of the projects at between $155-160 billion. These projects are highly steel-intensive and will boost steel demand substantially. Consequently, we expect that demand for metallurgical coal, which is used for steel production, will tick higher in the near future. Moreover, this could also help lift global met coal prices, which took a beating earlier in the year primarily due to a decline in demand from China.

Alpha is one of the largest shippers of coal to Asia, especially met coal. The company produced nearly 19 million tons of met coal in 2011 (including output from Massey since June 1, 2011), out of which more than 70% was exported. Europe receives the majority of the company’s met coal exports, followed by Asia. While weak economic conditions in Europe will likely pull down met coal demand in the region, we expect Asian markets including China and India to pick up the slack.

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Notes:
  1. ALPHA NATURAL RESOURCES ANNOUNCES STRATEGIC REPOSITIONING PLAN, ANR Press Release, Sept 18 2012 []