Alpha Natural Resources Earnings: Cost Improvements Encouraging Despite Met Coal Headwinds

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ANR: Alpha Natural Resources logo
ANR
Alpha Natural Resources

Alpha Natural Resources (NYSE:ANR)  announced its Q1 2014 earnings on May 1, reporting a set of numbers that beat  market expectations. Although the company’s revenues declined by 17% year-over-year to about $1.1 billion due to lower prices and volumes for both thermal and metallurgical coal, net losses narrowed to around $55.7 million from about $110 million a year ago, owing to a one-time gain on asset sales as well as better cost management. [1] Below we take a brief look at some of the trends that influenced the company’s earnings for the quarter.

See Our Complete Analysis For Alpha Natural Resources

We have revised our price estimate for ANR to around $5, which represents an 8% premium over the current market price.

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Metallurgical Coal Continues To Struggle On Seabourne Glut

Alpha’s metallurgical coal business remained lackluster, with volumes falling by around 13% year-over-year to about 7.58 million tons, while price realizations dropped 13% to around $90 per ton. The global seaborne met coal markets continue to see oversupply due to a seasonal slowdown in Chinese iron production, higher coking coal production in Australia as well as weaker exchange rates in many producing countries, which have helped miners lower their dollar costs of sales. Alpha expects the met coal markets to remain oversupplied through 2014, but expects to see better supply-demand balance in 2015, as many of the suppliers in the seaborne coal market are believed to be operating with negative cash flows, which would be unsustainable. The company indicated that large miners in markets such as Australia, Canada and the U.S. have been scaling back on supplies. [2] The company has cut its guidance for met coal volumes for 2014 to 15  to 18 million tons, down from its previous guidance of around 16 to 20 million tons.

Given the relatively low headroom on the pricing front, Alpha, like most coal producers, has had to focus on streamlining its cost base in order to drive margins. For this quarter, the company reported that average cost of coal sales for the eastern operations dropped to around $65.73 per ton, down from around $69.52 per ton during Q1 2013.

Thermal Coal Outlook Brightens

Alpha’s thermal coal business saw its volumes and pricing decline slightly this quarter. Powder river basin coal shipments fell by around 5% year-over-year to around 9.45 million tons, while Eastern thermal volumes fell by 4% to $7.58 million tons. Pricing for Eastern thermal coal declined by about 6% to $58.25, while prices for PRB coal declined 6% to $12.26 per ton. Although thermal coal consumption has actually been trending upwards in the United States on the back of higher natural gas prices and colder weather, utility companies have been drawing down from their inventories faster than they have been replenishing them, partly due to rail and barge disruptions. For instance, as of February – the most recent data available – coal inventories had decreased 32.2% year-over-year, bringing total U.S. coal stocks in the electric power sector to their lowest levels since March 2006. [3] However, the outlook is promising, since utility companies will need to replenish their coal inventories going forward. Alpha has indicated that it was seeing increasing RFP (request for proposal) activity in the thermal coal space, and this could give rise to more contracts and possibly better pricing. The company narrowed the range for its thermal coal shipments guidance for 2014 to 26 to 30 million tons, from a previous estimate of 24 to 30 million tons.

Summary Of Model Changes

We have updated our valuation model for Alpha Natural Resources to account for recent trends in the metallurgical coal business. We have reduced our estimates for the company’s met coal shipments to around 17 million tons for 2014 , rising to around 21 million tons by the year 2020. We have also reduced our projections for met coal price realizations to around $89 for the year 2014, in line with the company’s guidance. Our revised price estimate stands at around $5, down from a previous estimate of about $5.50.

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Notes:
  1. Alpha Natural Resources Q1 2014 Earnings Press Release, Alpha Natural Resources, May 2014 []
  2. Alpha Natural Resources Q1 2014 Earnings Call Transcript, Seeking Alpha, May 2014 []
  3. Electricity Monthly Update,U.S. EIA []