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Weak Coal Prices Unearth Mining Troubles

Stocks in this article: ACI JRCC

NEW YORK (TheStreet) -- As if mining coal isn't already rough enough, companies like Arch Coal (ACI) and James River Coal (JRCC) are heading into more hard times. Metallurgical coal prices hit a six-year low while Central Appalachian, or CAPP, coal prices followed natural gas higher, but failed to appreciate enough to save coal producers.

Arch Coal traded recently at $4.63 a share, while James River Coal shares changed hands at 76 cents. Expect James River Coal stock to be delisted from the Nasdaq soon and the company may also file for bankruptcy.

Metallurgical coal and CAPP coal have different uses, qualities and market prices. Metallurgical coal can be used in steel production, for instance. CAPP coal, also referred to as thermal coal, has a lower energy output and is insufficient for use in steel production, but can be used in power production.

Arch Coal is actively engaged in divesting its non-core thermal coal assets, which improves the outlook for long-term viability, as metallurgical coal should not see the same reduction in overall demand as thermal coal.

In 2013, Arch Coal reported a net loss of $642 million. The good news for a company like Arch Coal is that it may still be cash flow positive in terms of operating cash flows, even if it doesn't earn a profit. For 2013, the company's net cash position improved. Two non-cash items, $426 million in depreciation and $265 million in goodwill, were the largest loss drivers.

In an adept financial move, the company chose to tender $438 million of its 8.75% senior notes for slightly above par value and restructure its credit agreements. This should help to reduce interest expenses.

Arch Coal's financial position stands in stark contrast to James River Coal's position.

James Coal recently reported in its cost to produce one ton of coal is $77.80. CAPP coal prices with an April delivery just hit $59.78, well below the company's production costs. This is obviously a recipe for extreme cash burn rates.

The market for CAPP is primarily in power production, as it remains one of the cheaper energy sources. Unfortunately for coal producers, EPA regulations are pushing some power producers to begin shuttering plants. This is the macro force behind lower prices.

If power producers can find a way to efficiently capture carbon and sequester it, then CAPP coal prices might rise, but this appears to be a technology that is many years away from being profitable.

Carbon Capture and Sequestration, or CCS, technology involves a process by which waste carbon dioxide is captured in the burning of fossil fuels. Currently, power plants producing energy using natural gas create roughly 40% of the carbon emissions of a typical coal powered plant. With CCS, the carbon dioxide output of a coal powered plant falls roughly 90%.

Then, there is the added question of what to do with all that carbon once it has been captured. Some theoretical uses of the carbon include pumping it into natural gas wells to boost production, which is of course another unproven technology.

A near-term catalyst could provide some relief for CAPP coal prices, such as EPA easing restrictions. However, most likely the damage is already done for some producers.

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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