No positive changes so far
Walter Energy, Inc. (NYSE:WLT) has beaten earnings estimates, losing $34.5 million, or $0.55 per share. Revenue was $441 million, down 10%. The company has decreased its met coal sales volume by 12%. The interest expense weighed on the results once again. Walter Energy paid $53 million of interest in the second quarter.
Walter Energy, Inc. (NYSE:WLT)’s management must regret the decision to take that much debt to purchase Western Coal for $3.3 billion back in 2011. Then, the price of coal was rising. Now, it’s way below the levels of 2011 and shows no signs of improvement. Walter Energy, Inc. (NYSE:WLT)’s long-term debt stood at $2.6 billion at the end of the second quarter.
Other market participants confirm that the market remains oversupplied. Arch Coal Inc (NYSE:ACI) and Alpha Natural Resources, Inc. (NYSE:ANR) have stated they see continuing pressure on the prices of both met coal and steam coal. Both companies have finished the second quarter with a loss. Low coal prices and debt burden weighed on the results.
Arch Coal Inc (NYSE:ACI) has accumulated $5 billion of debt, while Alpha Natural Resources, Inc. (NYSE:ANR) owes $3.35 billion. This poses significant risks for both companies. The situation with coal prices has not improved, and investors are getting nervous. Companies struggle to produce meaningful cash flows, and their stocks are under pressure.
Liquidity concerns
Walter Energy, Inc. (NYSE:WLT)’s liquidity has been under the spotlight for some time. The company has finished the quarter with $171 million of cash on hand and $317 million available under the revolving credit agreement. The company stated that it planned asset sales that would bring in $250 million in 9 months. This would ease the short-term pain, but would not cure long-term problems.
Just like other miners, Walter Energy, Inc. (NYSE:WLT) needs higher coal prices. The company can exist with current prices until the big debt repayment comes due. The same is true for both Arch Coal Inc (NYSE:ACI) and Alpha Natural Resources, Inc. (NYSE:ANR). These companies are in a better situation from a liquidity point of view. Arch Coal Inc (NYSE:ACI) finished the second quarter with $900 million of cash and $300 million of borrowing capacity. Alpha Natural Resources, Inc. (NYSE:ANR) ended with $1 billion of cash and $0.9 billion available under the credit facility.
Given the current situation, coal miners will have trouble refinancing their debt if necessary. Walter Energy tried to refinance its debt in June, but gave up the idea just a week after the initial announcement.
Outlook
Global crude steel production was up 2% year-over-year in the second quarter. Met coal projects that were started some time ago in Australia and the U.S. continue to come to market, adding to supply. Currently, 20% – 30% of global coal supply is uneconomic. Ultimately, it will lead to supply cuts, leading to price increases. The problem is that no one knows when exactly that will happen. Every coal producer wants to live, and they find the means to survive.
The battle on costs continues. Walter Energy has improved its cash cost per ton by 12.6% sequentially. The company has stated that it would shut any mine that does not bring positive results. Arch Coal Inc (NYSE:ACI) has shut 2 contract mines at Cumberland River. These moves are good, but not good enough to lift the companies out of their problems. Coal miners continue to depend on coal prices and the world economic outlook.
Bottom line
The clock is ticking for Walter Energy. The situation with prices does not improve, and the debt level continues to put pressure on the company. The stock trades at a 0.68 P/B, which is more expensive than Arch Coal Inc (NYSE:ACI)’s 0.30 P/B and Alpha Natural Resources, Inc. (NYSE:ANR)’ 0.23 P/B. All these companies are not expected to be profitable for the next two years.
Short-term downside risks prevail for all three companies. The long term upside potential is big, given the level of cost optimization that the companies had to implement. However, I think it will get worse before it gets better.
The article Never-Ending Pain for This Coal Miner originally appeared on Fool.com is written by Vladimir Zernov.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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