A sharp deterioration in the demand and pricing environment for both metallurgical and thermal coal has taken its toll on the business prospects of Alpha Natural Resources (NYSE:ANR). The company’s profitability and liquidity have been negatively impacted by the adverse business conditions that it is currently facing. This has resulted in the company’s stock price falling nearly 80% over the course of the last year or so. We have a new $1 price estimate for Alpha Natural Resources, which reflects the grim situation that the company is currently facing. In this article, we will look at the trends driving Alpha Natural’s business prospects and our valuation of the company’s stock.
- Alpha Natural Resources’ Earnings Review: Weak Coal Demand And Pricing Weigh On Q1 Results
- Alpha Natural Resources’ Earnings Preview: Weak Coal Demand And Pricing To Weigh On Q1 Results
- Two Scenarios That Could Boost Alpha Natural Resources’ Stock Price
- Trends Driving Our $1 Price Estimate For Alpha Natural Resources
- Alpha Natural Resources’ Earnings Review: Weak Coal Demand And Pricing Weighs On Q4 Results
- Alpha Natural Resources’ Earnings Preview: Weak Coal Demand And Pricing To Weigh On Q4 Results
Metallurgical coal is a major input in steelmaking. Thus, demand for metallurgical coal by the steel industry plays a major role in determining its prices. The prices for Alpha Natural’s metallurgical coal sales are benchmarked to international metallurgical coal prices. International metallurgical coal prices are largely determined by Chinese demand, since China is the largest consumer of metallurgical coal in the world. Demand for the commodity by the Chinese steel making industry has been weak, adding to subdued demand from other major consumers such as Japan and the EU. Chinese steel demand growth is expected to slow to 2.7% in 2015, down from 6.1% and 3% in 2013 and 2014, respectively.  Weak Chinese demand for steel has translated into weak demand for metallurgical coal. Weak demand coupled with an oversupply situation, due to expansion in production by major mining companies, has resulted in plummeting coal prices.  The benchmark Australian metallurgical coal price stands at around $119 per ton, around a third of its 2011 peak level of $330 per ton.  This fall in international coal prices has negatively impacted price realizations for Alpha Natural’s metallurgical coal business. Realized prices for Alpha Natural’s metallurgical coal mining business stood at $86.14 per ton in the first nine months of 2014, as compared to $99.01 per ton and $131 per ton in 2013 and 2012, respectively.   Given the prevailing weak demand and oversupply situation, Alpha Natural is expected to face a weak demand and pricing environment for metallurgical coal in 2015 as well.
Thermal coal prices have also weakened due to an oversupply situation. This is primarily due to the expansion of coal supply by major mining companies, despite weak demand conditions.  Demand for the commodity has weakened as a result of weakening demand from China, the world’s largest consumer of thermal coal. As a result of the country’s anti-pollution drive, coal’s share of new generation capacity has dropped to 40% over the past 12 months, from 75% between 2010 and 2012.  Realized prices for Alpha Natural’s Eastern Steam Coal business,which produces thermal coal, stood at $58.32 per ton in the first nine months of 2014, as compared to $62.31 and $65.92 per ton in 2013 and 2012, respectively.   Given the prevailing weak demand and oversupply situation, Alpha Natural will face a weak demand and pricing environment for thermal coal in 2015 as well.
Profitability and Liquidity
The adverse market conditions for coal have taken their toll on Alpha Natural’s profitability and liquidity. Excluding one-time items,the company’s operating income has fallen from a loss of $198 million in the first nine months of 2012, to losses of $598 million and $485 million in the corresponding periods of 2013 and 2014 respectively.  These figures represent a fall in operating margins from around -4% in the first nine months of 2012 to roughly -15% in the first nine months of 2014. Even more worryingly for the company, its cash flow from operations has declined from an inflow of $306 million and $179 million in the first nine months of 2012 and 2013 respectively, to a cash outflow of $253 million in the first nine months of 2014. 
In response to deteriorating liquidity and profitability, the company has lowered its capital spending and sold off some of its coal mining assets. Alpha Natural’s capital expenditure stood 21% lower on a year-over-year basis in the first nine months of 2014.  The company sold off the assets of its subsidiary, AMFIRE Mining Company, for $86 million in December.  In addition, the company idled some of its thermal coal mines in West Virginia at the end of last month. These mines accounted for 1.5 million tons, or around 2% of the company’s thermal coal production in 2014.  If market conditions remain subdued or deteriorate further, Alpha Natural Resources may be forced to idle or divest more of its mining assets in order to boost its liquidity. However, it may not receive the best valuations for its assets under current market conditions.
Trefis Price Estimate
In view of the prevailing demand and pricing environment for coal, we have revised down our estimates for shipments, realized prices, and margins for all divisions. This has led to a downward revision in our price estimate for Alpha Natural Resources to $1.11. With the prevailing subdued demand and pricing environment for coal expected to persist in the near term, prospects look quite bleak for Alpha Natural Resources. Things may improve slightly for the company if it is able to offload some of its high-cost coal assets. We will be keenly following developments at Alpha Natural Resources.
- Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association [↩]
- Coking coal price crashes through $100, Mining.com [↩]
- Metallurgical Coal at 6-Year Low as Chinese Demand Slows, Bloomberg [↩]
- Alpha Natural Resources’ Q3 2014 10-Q, SEC [↩] [↩] [↩] [↩] [↩]
- Alpha Natural Resources’ 2013 10-K, SEC [↩] [↩]
- Australian coal industry caught in ‘perfect storm’, Financial Times [↩]
- Thermal coal falls victim to China’s energy policy, Financial Times [↩]
- Alpha Natural Resources Announces Completed Sale of Amfire Mining Assets to Rosebud Mining, Alpha Natural Resources News Release [↩]
- Alpha Natural Resources Subsidiaries Announce Plan to Downsize West Virginia Mining Operations, Alpha Natural Resources News Release [↩]