Walter Energy, Inc. (WLT), Arch Coal Inc (ACI): Never-Ending Pain for This Coal Miner

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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