Coal is not one of those sectors that investors are currently thrilled about. Clean air initiatives in western countries, cheap gas and solar energy and the slowdown of the Chinese economy, are all factors that provoked a marked decline in coal demand. Walter Energy, Inc. (NYSE:WLT) has been fighting an uphill battle. And it has been losing since April 2011.
Shareholders have seen their stock fall from $141 to $10 over a two and a half year period. Yet, due to Walter Energy, Inc. (NYSE:WLT)’s Q2’13 financial results -especially EPS 28% above analyst estimates, the stock jumped and closed at $15.45 on September 9th. The question remains, does the segment hold potential for growth or is just a dead cat bounce?
Walter Energy, Inc. (NYSE:WLT) produces met coal, a resource that is in low demand and thus has suffered serious price drops. In order to counteract the effects of falling prices, the firm has closed down mines in Alabama and British Columbia. Furthermore, the company intends to cut capital spending by about $150 million in 2013, to half of its 2012 spending. In July, Walter Energy, Inc. (NYSE:WLT) even cut its quarterly dividend to 1 cent from 12.5 cents, as one of the conditions for receiving a $2.73 billion credit.
The balance sheet is not Walter Energy, Inc. (NYSE:WLT)’s only concern. Coal sales projections are down to 11 million tonnes, from the expected 11.5 million to 13 million tonnes anticipated at the beginning of 2013. With lower production volumes and met prices down 20% compared to the same period a year ago, Walter Energy, Inc. (NYSE:WLT) is looking at red numbers. And, it comes as little surprise that the company is suffering, since the global coal industry is in overall decline.
The reason for the decline in prices is strongly correlated with a stagnated demand for steel in Asia, since met coal is utilized in steel manufacture. Additionally, Russian and African met coal producers are flooding the market. With the current outlook of excessive supply and dropping prices, Walter Energy, Inc. (NYSE:WLT) will continue to face a troublesome future. With high debt levels and shrinking production rates, in a market that is suffering from price depression, the small bump in stock prices should definitely be considered a dead cat bounce.
Disclosure: Pablo Erbar holds no position in any stocks mentioned