Alpha Natural Resources Preview: Weak Met Coal Demand Could Impact Results

Alpha Natural Resources (NYSE:ANR), one of America’s largest coal producers, is set to release its Q3 earnings on Friday, November 2. In the second quarter, the company’s revenues grew by 11% y-o-y while operating losses widened sharply due to asset and goodwill impairment charges. We expect the Q3 results to be impacted by pricing pressures in the US thermal coal market and weaker global demand for met coal.

Utility and Industrial Coal Sales Will Remain Depressed

The company’s utility and industrial coal division is heavily exposed to the US market where prices have been depressed due to competition from cheaper shale gas. Thermal coal prices are expected to remain low going forward as most utilities now prefer to install gas power plants which call for lower capital investments, have lower fuel costs, and produce lower emissions. Coal has historically accounted for about half of the US electricity generation, but earlier this year, natural gas and coal reached parity for the first time, fueling about 32% each of US electricity generation. ^[1]

While most of the challenges ANR faces can be attributed to the broader industry slowdown, the company has been taking initiatives to get back on track. To temper weaker American sales, ANR has been focusing on thermal coal exports to Europe, a market where natural gas prices are about 3 times of what they are in the United States, making coal a more viable source of energy. The company also continues to cut back on its coal production. It announced in September that it will close 8 coal mines in Virginia, West Virginia and Pennsylvania and will lay off 1,200 miners. Most of these mines produce thermal coal. ANR is also cutting back on its expenses, reducing capex and SG&A guidance for the year.

Met Coal Demand Slow This Quarter

Metallurgical coal is a higher grade of coal with lower ash and sulfur content and is used to produce coke, an important raw material used in steel manufacturing. Unlike the utility coal division, ANR’s met coal division is globally diversified with about 70% of the production catering to export markets. ANR has been relying on its met coal business to offset losses from its thermal coal business as met coal prices are about 3 times that of thermal coal.

However, the economic crisis in Europe, a tough investment climate in India, and softening steel demand in China are expected to weigh on the company’s met coal sales for the quarter. Prices for met coal in China have dropped by almost 50% this year. Nevertheless, in the long term, demand from China is expected to recover as the government recently approved a $156 billion plan to build new highways and infrastructure projects, which will drive steel production.

We will revisit our $9 price estimate for Alpha Natural Resources following the earnings release.

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1. Chinese Slowdown Idles U.S. Coal Mines, WSJ [↩]