Alpha Natural Resources (NYSE:ANR) announced its Q2 2014 earnings on August 6, reporting a set of numbers that were lower than expected. Total revenues in the second quarter of 2014 were $1.1 billion and adjusted EBITDA was $50 million compared with total revenues of 1.3 billion and adjusted EBITDA of 76 million in the second quarter of 2013.  The company continues to face severe challenges in the coal market and in the absence of any recoveries in the price of coal, it has been focusing on improving its liquidity by aligning its cost base and balance sheet with the existing conditions for the past two years.
We have revised our price estimate for ANR to around $5, which represents a ~35% 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 20% year-over-year to about 4.5 million tons, while price realizations dropped 15% to around $86 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 a 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.The company stuck to its guidance for met coal volumes for 2014 to 15 to 18 million tons for the fiscal year.
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 $62 per ton, down from around $70 per ton during Q1 2013. 
Thermal Prices Fail To Support Outlook
Alpha’s thermal coal business saw its volumes and pricing decline slightly this quarter. Powder river basin coal shipments fell by around 9% year-over-year to around 7.9 million tons, while Eastern thermal volumes increased by 4.7% to $7.49 million tons.  Pricing for Eastern thermal coal improved slightly compared to the previous quarter but is down by about 6% to $58.53 compared to last year’s level, while prices for PRB coal declined 4.5% to $11.81 per ton.  Over the past three months, thermal coal consumption had been trending upwards in the United States on the back of higher natural gas prices and colder weather, utility companies had been drawing down from their inventories faster than they were replenishing, partly due to rail and barge disruptions. For instance, as of February 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.  However, recent price trends have failed to support these expectations. Although domestic utility inventory levels remain well below normal, low natural gas prices, increased imports of thermal coal, primarily from Colombia, and the reduction in usage of thermal coal by power plants in because of stringent EPA regulations have led to a low price environment in the thermal coal market. In addition, slow electricity demand, which has stayed below 2008 levels, continues to inhibit coal demand.  Disruptions to rail transportation continue to hinder shipping volumes across all regions, particularly in the Powder River Basin (PRB). According to the company, utility inventory levels at the end of June 2014 were at approximately 56 days of coal burn compared to a 5 year average of approximately 72 days.