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

NEW YORK (TheStreet) -- Some industries are hot. Coal is not.

Last year was a rough ride for coal producer Alpha Natural Resources (ANR), with the company's adjusted net loss jumping to $475 million last year compared to adjusted net loss of $207 million in 2012.

Coal was not hot, with sales declining 21% plus a decline of around 11% in average realized price per ton. ANR shares, trading around $4 now, are down nearly 39% for the year to date and 48% for the past 52 weeks.

Although thermal coal sales are expected to improve, the big question remains whether Alpha Natural can survive current market challenges.

Thermal coal demand in the U.S. is improving because of the rise in natural gas prices. In 2014 and 2015 the natural gas spot price is expected to remain around $4.17 per million British thermal units (MMBtu) and $4.11 MMBtu respectively, which was around $3.76 per MMBtu in 2013 and $2.77 per MMBtu in 2012.

However, its metallurgical (or met) coal business is expected to remain challenging due to the increase in supply, especially from Australia last year. In 2013, global met coal supply was around 8.5 million metric tons. Alpha Natural expects met coal supply will further increase by 10 million metric tons over 2013 this year. One positive aspect is that global met coal demand is also expected to increase by 3.3% year over year, which will balance the incremental supply to some extent.

As current metallurgical coal prices are low and global supply is increasing, Alpha Natural has reduced its own met coal production guidance for 2014 from 18 to 22 million tons to 16 to 20 million tons. On the other hand, the company has increased its thermal coal guidance by 2 million tons.

The change in guidance is mainly for the low quality met coals like PCI coal and semi-soft coal. These coal varieties are generally sold in the met coal market, but their spot price is currently lower than the thermal coal spot price. Hence, Alpha Natural will sell these products as a thermal coal to receive better prices, which will help it generate higher revenue.

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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