Rhino Resource Partners, L.P. (RNO), Walter Energy, Inc. (WLT): One High Yielding Coal Stock That Might Make Sense

Owning and operating coal mines requires a lot of up front capital. You need to buy or lease the mine, and you need to buy or lease the equipment. It doesn’t matter how much coal is pulled out of the mine or how much you get paid for the coal, those costs don’t go away and they don’t go down. Debt costs raise the bar even further due to the interest being paid.

Debt hurts

For example, long-term debt accounted for about 75% of Walter Energy, Inc. (NYSE:WLT)’s capital structure at the end of the second quarter. For comparison, long term debt made up about 55% of industry giant Peabody Energy Corporation (NYSE:BTU)’s capital structure. Clearly, Walter Energy, Inc. (NYSE:WLT) isn’t in as solid a financial position, which helps explain why it had to trim its dividend to a token penny a share and amend a credit facility to improve liquidity.

Walter Energy, Inc. (NYSE:WLT), which focuses on metallurgical coal used in steel making, has been taking aggressive actions to deal with the steep drop in met coal prices. For example, it’s closed or is in the process of closing mines. And it plans to cut full-year 2013 capital spending to about $150 million, less than half of what it spent in 2012. Peabody Energy Corporation (NYSE:BTU) trimmed its budget by a similar amount, but didn’t have to cut its dividend or amend credit facilities.

One expense that didn’t go down for Walter Energy, Inc. (NYSE:WLT) was interest costs. The company paid about $53 million in the first and second quarters. That amounted to 10% of revenues in the first quarter, but because the top line headed lower, 12% in the second quarter. At Peabody Energy Corporation (NYSE:BTU), interest expense was about 6% of sales in both the first and second quarters despite a top line drop.

Walter Energy, Inc. (NYSE:WLT) started the year projecting coal sales of between 11.5 million and 13 million tonnes. It is now projecting just 11 million tonnes, down about 6% year over year. Looking at lower volume and weak pricing, met coal pricing was down over 20% from the year ago period in the second quarter, Walter Energy’s bottom line is likely to be in the red all year.