ANR Q4 Preview: Thermal Coal Outlook In Focus

Alpha Natural Resources (NYSE:ANR) is expected to release its fourth quarter earnings on February 14. Over the last year, the firm’s stock has fallen by over 50% weighed down by weaker global metallurgical coal demand and the declining usage of coal in power plants across the United States. In the third quarter of 2012, the firm’s net loss stood at $46 million compared to a profit of $63 million in Q3 2011 while revenues also dropped by nearly 30%. We do not expect things to get much better in Q4 either as rivals like Arch Coal (NYSE:ACI) have posted poor results citing weaker price realizations and lower volumes. Here’s a quick look at the numbers and the trends that we will be watching when the firm releases its earnings on Wednesday.

Utility And Industrial Division: Exports Volumes Can Help Weakness

The firms utility and industrial coal division produces thermal coal, which is primarily used as a fuel in electricity generation. The division primarily caters to the North American market and accounts for over 80% of the firm’s volumes. Over the past two years the division’s revenues have been relatively flat and they face an ever increasing threat that volumes could actually decline due to competition from lower priced natural gas and stricter environmental norms, which are making it more expensive to operate coal-fired power plants.

In order to de-risk its revenues, the firm has been focusing on boosting thermal coal exports. ANR already has significant terminal capacity in the U.S. East Coast and Gulf Coasts, and can leverage it to access lucrative markets in Europe and Asia where coal prices are much higher. During the first three quarters of 2013, the firm exported around 4.5 million metric tonne of thermal coal (around 6% of production), which was quite encouraging considering that its exports were almost nothing a few years ago. It remains to be seen how the firm can build on this momentum and boost its exports further.

Met Coal Prices Could Continue To Weigh On Margins

More than three-quarters of the firm’s met coal revenues come from exports, and this division is important from a perspective of diversifying the revenue stream and also helps the firm to outweigh the effects of weaker thermal coal demand in the U.S. However, the firm’s met coal business in recent years has been impacted by excess supply and weak global demand, which have caused realized prices to fall by around 25% over the last year. While we expect the weak pricing to hit margins in Q4 as well, miners in the U.S. and Australia have been scaling back on their production of late, and this could signal that prices will see a revival in the near future. Met coal demand is tied with the health of the broader global economy, given that steel production varies with infrastructure spending and the health of the automobile industry. The firm could see demand rise as China and other emerging economies pick up on their infrastructure spending. (See Also: Our Take On ANR’s Met Coal Business)

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