Alpha Natural Resources Earnings Preview: Thermal Coal In Focus

Alpha Natural Resources (NYSE:ANR), one of America’s largest coal producers, is scheduled to release its Q3 2013 results on October 31. We expect the company’s losses to widen both on a sequential and year-over-year basis given the headwinds in the coal markets and some unscheduled downtime at one of the firm’s mines. During Q2 2012, the company reported quarterly revenues of around $1.34 billion, down from around $1.85 billion in Q2 2012, while the loss from operations stood at around $197 million as both shipments and pricing declined. In this note, we take a look at some of the key factors that will influence the performance of ANR’s thermal coal business, which accounts for a bulk of the firm’s volumes.

Trefis has a $5 price estimate for ANR, which is roughly 30% below the current market price.

Export Market Could Remain Sluggish: ANR’s thermal coal business is almost entirely dependent on the North American market which has been seeing more stringent emission norms as well as competition from natural gas. This could result in the retirement of as much as 32 GW of coal-fired plants, potentially impacting ANR’s thermal coal business over the long term. ^[1] This has made it imperative for the company to diversify its thermal coal business internationally. Last year, the company made some significant progress in ramping up its exports to close to 7% of overall thermal coal production. However, things have been somewhat sluggish this year as pricing has proved to be an issue due to strong supply in the seaborne coal markets as well as global macroeconomic uncertainties. Overall thermal coal exports from the U.S. declined from around 14.6 million tons in Q3 2012 to about 12.2 tons in Q3 2013, and we believe this could reflect on ANR’s exports as well. ^[2]

Mine Downtime Could Impact Margins And Shipments: Alpha’s Cumberland mine, which produces certain high margin varieties of thermal coal, experienced some unplanned downtime for over four weeks during the quarter due to unfavorable geological conditions. This downtime is expected to push up the average cost of the company’s eastern coal sales for this year to as much as $76 per ton from under $72 per ton during the first half of this year. ^[3] This downtime is likely to impact the company’s eastern coal shipments for this quarter and could also result in lower margins.

Rising Consumption From Power Plants: During the second quarter, ANR’s thermal coal shipments dipped significantly year-over-year, while prices fell by around 4% for both Eastern as well as Powder River Basin varieties. ^[4] However, thermal coal consumption from the power plants in the United States has actually been rising, and during September coal accounted for close to 41% of the country’s electricity generation. ^[5] According to the U.S. EIA, coal consumption for electricity generation grew from about 212 million tons during Q1 2013 to about 243 million tons during Q3. However, the increased consumption is unlikely to have entirely reflected on demand since utilities have been drawing down on their inventories. Power plant coal inventories have fallen by around 11% between Q1 2013 and Q3, with stocks for North Appalachian coal falling to around 65 days of burn. ^[2] We believe that the rising consumption coupled with the recent production curtailment by many small producers bode well for coal pricing in the near term.

Trefis will be updating its model and price estimate for ANR following the earnings release.

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1. ANR Investor Presentation [↩]
2. US EIA [↩] [↩]
3. ANR Q2 Call, Seeking Alpha [↩]
4. ANR Press Release [↩]
5. Peabody Energy Q3 Call, Seeking Alpha [↩]