Lower Production Costs Help Alpha Natural Narrow Q4 Loss

by Trefis Team
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ANR
Alpha Natural Resources
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Quick take

  • ANR narrows y-o-y operating loss to around $44 million on lower production costs, beating expectations.
  • Revenues continue to be impacted by slowing U.S. thermal coal shipments and lower met coal prices.
  • Thermal coal exports doubled last year to 6 million tonnes, pricing could be weak going forward.
  • Benefits from restructuring taking effect, eastern thermal coal production costs reduced by 13% y-o-y.
  • Met coal could see a recovery as Chinese consumption rebounds and Australian supply softens.

Alpha Natural Resources (NYSE:ANR), one of America’s largest coal producers, released its third quarter earnings on February 14. While the numbers were weak amid weak industry conditions, they beat market estimates sending the stock around 15% higher in Thursday’s trading. Quarterly revenues were down to around $1.56 billion from $2.07 billion last year on account of lower volumes and selling prices. However, the firm’s loss from operations narrowed to around $44 million from around $784 million last year, partly due to lower production costs. [1]

Thermal Coal Volumes Continue To Decline

Low gas prices and stringent environmental regulations are causing power plants and industries to shift away from thermal coal, and this trend continues to reflect on ANR’s business. Shipments declined by around 20% since the last year. Thermal coal sales amounted to around $759 million, down from around $964 million last year.

Thermal Coal Exports Rise, But Pricing Could Impede Growth:

ANR has been ramping up its  thermal coal exports to offset weak demand in the U.S. market. Thermal coal demand is still relatively strong in markets like Europe which have relatively high gas prices. Over the last year ANR’s thermal coal exports touched 6 million tonnes, nearly double the 2011 number. However, since most U.S. producers have been scaling up thermal coal exports, this has taken a toll on the pricing for seaborne coal due to sudden surge in supply. Lower pricing could potentially hamper thermal coal exports in the near term.

Production Cost Reductions:

In September, the firm announced that it would be shutting down a total of eight mines with high production costs and mines producing varieties of  coal that was in lower demand. The restructuring resulted in a reduction of around 1,200 jobs and production cutbacks to the tune of 16 million tons. The move seems to be paying off now as the firm reported that costs for eastern coal dropped by around 13% since last year to around $68. The firm is also implementing plans to cut overhead costs by around $150 million per year. [2]

Met Coal Continues Its Decline, But Recovery Could Be Near

ANR became the largest met coal producer in the U.S. following its acquisition of Massey Energy. The division is heavily geared towards exports and is of strategic importance for the firm since it allows it to diversify revenues away from the U.S. market.

However, the performance of this division has been weak through 2012 due to slowing growth in China and weaker demand from Europe. Additionally, prices have also been impacted by stronger supply from Australia, one of the world’s largest met coal producers. Realized prices declined by around 22% over the past year while shipments for the quarter dipped by around 8% year-over-year. To navigate the difficult market, ANR  has been focusing on the highest margin coals while scaling down production of lower quality coals that are commanding weaker pricing. (See Also: Our Take On ANR’s Met Coal Business) However, prices are expected to be bottomed out in the near future, as Chinese consumption has been picking up and weather effects in Australia are beginning to impact supply from the region.

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Notes:
  1. Form 8-K []
  2. Seeking Alpha []
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