ANR’s Weak Pricing And Mine Downtime Weigh On Results

Alpha Natural Resources (NYSE:ANR) released its second quarter earnings on August 2, displaying a downbeat set of numbers that mirrored the weakness in both the North American and global coal markets. Quarterly revenues were around $1.34 billion, down from around $1.85 billion in Q2 2012 while the loss from operations stood at around $197 million, which was less than the $2.64 billion operating loss the firm posted last year due to asset and goodwill impairment charges. ^[1] We believe that the company could continue to face significant pressures in the near term given the declining trend in U.S. thermal coal consumption and the overcapacity in the seaborne coal market. Here is a brief look at some of trends underlying the firm’s earnings for the quarter.

See Our Complete Analysis For Alpha Natural Resources Here

Thermal Coal Business: Lower Shipments, Power Plant Retirements, Cumberland Downtime

ANR’s thermal coal business continues to face significant headwinds in both the U.S. market and overseas. During the quarter, the company sold 8.8 million tons of Powder River Basin coal, which is about 14% lower than the last year while eastern steam coal shipments stood at 7.2 million tons, down 35% year-over-year. Realized prices for both varieties of coal fell by about 4% since last year.

While the decline in demand is partially due to the fact that electric utilities in the United States have been consuming coal out of their inventories, it is also because of relatively low gas prices. Most of ANR’s thermal coal production is out of the money when gas prices are below $4 per MMBtu. ^[2] Henry Hub gas prices are current ruling at under $3.6 per MMBtu.

Coal fired power plants are also facing increasing scrutiny due to their high CO2 and acidic gas emissions. Under President Obama’s new climate plan, both new as well as existing power plants will be subject to greenhouse gas emission regulations. (See Also: How Obama’s Climate Action Plan Impacts The Energy Sector) ANR has also mentioned that the impact of regulatory-driven plant retirements has already been quite significant, particularly in the central Appalachian region and we believe that this could continue. The share of coal in the U.S. electricity generation space has fallen from around 51% in 2003 to around 37% in 2012 and could fall further as the new emission standards come into place.

ANR has been counting on the export market to offset the declining consumption in U.S. thermal coal consumption but the results have been somewhat mixed so far. The export market in the Atlantic basin has been weak with current market prices being nonviable for most American thermal coal producers.

Besides the lower sales and pricing pressure, the company’s margins were also weighed down by unexpected downtime at its Cumberland mine and unfavorable mining conditions at the Emerald mine both of which hurt the production of a certain high margin variety of thermal coal. The company expects the Cumberland mine to resume production towards the end of August.

Metallurgical Coal Business: Production Scaled Back Given Weak Prices

The going continues to be tough for ANR’s metallurgical (met) coal business as well. Although shipments for met coal remained almost flat since last year at around 1 million tons, realized prices have fallen to around $101 per ton, down by around 3% since the previous quarter and around 22% since last year. Although volumes have held up over the last year, they are unlikely to sustain going forward as ANR has idled around 1 million tons of annual met coal capacity that  is not viable at current prices. ((Alpha Natural Resources’ CEO Discusses Q2 2013 Results))

The near term outlook for this business also seems quite challenging. Large new sources of supply have come online or are expected to come online shortly, and this could further exacerbate the overcapacity situation in the global seaborne met coal market. ^[3] Also, given that many Australian producers have lower production costs compared to U.S. producers, it is likely to create further pricing pressure in the met coal markets in the near term. Demand growth is also expected to remain sluggish since the consumption of metallurgical coal is tied to the health of the global steel industry. Global crude steel production during the first half of the year rose by just about 2% year-over-year with production in Europe, North America and South America down by roughly 5%. Although China, which is the world’s largest met coal consumer, is expected to witness record high crude steel production this year, it has been producing more met coal domestically impacting the demand in the seaborne market. ^[4] However, since the met coal market is traditionally cyclical, we believe that the outlook could improve over the long run as the global economy and steel production pick up.

We have reduced our price estimate for ANR from around $6.50 to about $4.80 given the company’s revised shipment outlook and lower realized prices.

Understand how a company’s products impact its stock price on Trefis

1. ANR Press Release [↩]
2. Alpha Natural Resources’ CEO Discusses Q2 2013 Results [↩]
3. Seeking Alpha [↩]
4. WSJ [↩]