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Alpha Natural Needs to Get Hot Again in a Cold Coal Market

Metallurgical coal spot prices are related more to the Asian hard met coal benchmark assessments than other met coal markets. Therefore, to reduce its exposure to spot price volatility, Alpha Natural is selling more volume of met coal in North America from 2013. The company has already sold more than six million tons of met coal in North America and these volumes were priced during the fourth quarter of last year. An increase in North America business will help the company mitigate spot price volatility to some extent.

Along with reducing its exposure to the spot rate, the company is also taking cost reduction initiatives. Last year its annual cost reduced by $150 million, and this year it expects to reduce cost by another $200 million. These reductions are mainly concentrated towards cost of sales.

In 2013, Alpha Natural's cost of sales for the Eastern region, where it produces met coal, reduced to $71.40 per ton from $73.77 in 2012. This year, it expects to reduce costs to $67 per ton. Lower cost will help the company improve its margin in the current low met coal price environment.

Also, Alpha Natural entered a new joint venture to develop its Marcellus position of approximately 10,000 net acres. The company hasn't the revealed name of the joint venture partner and other details, but analysts expect the new joint venture could be structured similar to Alpha Natural's successful joint venture with Rice Energy (RICE).

The growth prospects from this deal include its combined platform of about 43,551 net acres in the Marcellus region, where natural gas production is growing, and 48,660 net acres in Ohio's Utica Shale, which is still in development stage but initial test results are expected in the second quarter of this year. With development of Utica Shale acreage, the company's production will further increase, which will provide a potential upside to its revenue.

The joint venture with Rice Energy helped Alpha Natural develop a portion of its Marcellus assets, and it created good value for the company. With this new joint venture, the company can unleash similar potential from its remaining Marcellus acreage.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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