Arch and Walter, Too Much Debt, U.S. Zombies?
Arch Coal Inc (NYSE:ACI) made an ill-timed acquisition of non-producing east coast coking coal assets in 2011. The company continues to advance the acquired assets towards first production, but profitability at $145 per tonne will be minimal. Arch bet the farm on this acquisition. It was a bad bet.
Walter Energy, Inc. (NYSE:WLT) is the only sizable pure-play coking coal producer in the U.S. It too made a mistake in 2011, Walter Energy, Inc. (NYSE:WLT) acquired high cost Canadian coking coal assets. However, Walter Energy, Inc. (NYSE:WLT) has some of the best quality coking coal in the world in its Alabama mines. Walter Energy, Inc. (NYSE:WLT) recently tried unsuccessfully to refinance its bank debt, which sent the stock a lot lower. Like Alpha Natural Resources, Inc. (NYSE:ANR), Walter Energy, Inc. (NYSE:WLT) needs higher coking coal prices to survive.
Peabody and Consol, Stronger, but Still Need a Big Improvement in Pricing
Peabody Energy Corporation (NYSE:BTU) used to be without question the bellwether U.S. coal company. Yet, by expanding into Australia to play with the big boys, Peabody bit off more than it can chew. The company is the largest producer of thermal coal in the U.S., but it’s being weighed down by debt and by loss-making operations in Australia at the moment.
Finally, CONSOL Energy Inc. (NYSE:CNX) has one of the best premium hard coking coal mines in North America. It can pump out 5 million tonnes per year. The mine has a relatively low cost structure, but not as low as mines in Australia. Consol can produce and make a small amount of money at $150 per tonne pricing, but it doesn’t move the needle. Consol also has a large natural gas business.
Conclusion
U.S. coking coal producers are in a world of pain. Despite aggressive efforts to cut costs, current benchmark pricing is just too low. Investors who expect coking coal prices to rebound above $200 per tonne relatively soon could be disappointed. Most of the U.S. coking coal players mentioned will likely make it through the next 12-24 months, but they are not good investments at this time. Stay away from coal.
The article Coking Coal Players Feel the Pain, When the Gain? originally appeared on Fool.com. Peter is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Peter Epstein owns shares of Alpha Natural Resources, CONSOL Energy, and Walter Industries. The Motley Fool has no position in any of the stocks mentioned.
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