Walter Energy, Inc. (WLT): Will This Coal Miner Stop Falling?

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Sometimes luck turns away from certain industries. This has been the case for coal miners this year. Prices for coal remain low. Despite all the efforts to reduce costs, coal stocks continue to suffer. The worst performer in the group is Walter Energy, Inc. (NYSE:WLT). This stock is down more than 57% this year. Will fortunes change for this troubled miner?

Walter Energy, Inc. (NYSE:WLT)

Why Walter Energy is down so much

Walter Energy, Inc. (NYSE:WLT) under-performs its peers. Arch Coal Inc (NYSE:ACI)Alpha Natural Resources, Inc. (NYSE:ANR) and Peabody Energy Corporation (NYSE:BTU) are down 32%, 34% and 29%, respectively. The reason for this difference is simple–Walter Energy is a pure met-coal play, while others produce thermal coal as well. Met coal is down together with iron ore and steel prices. Weakness in Europe, a slowdown in China and excessive supply cannot push prices in the upward direction.

The recent news was not positive for Walter Energy, Inc. (NYSE:WLT) either. Moody’s Corporation (NYSE:MCO) downgraded the company with a negative outlook. The ratings company stated that the situation with supply and demand would not support price increases for met coal for at least a few quarters.

Raymond James cut its 2013 and 2014 met-coal price forecasts. It highlighted the same things: there is a lot of supply, but the demand does not grow. The company downgraded Arch Coal, Alpha Natural Resources, Peabody Energy and Walter Energy, Inc. (NYSE:WLT).

What can be done?

Walter Energy has stated that it has begun exploring options to refinance a portion of its existing debt in order to increase its financial flexibility. Debt is a problem for Walter Energy, Inc. (NYSE:WLT). It owes $2.6 billion. The debt was taken to finance the purchase of Western Coal. Looking behind, this was not the best decision.

The company acquired additional production capacity and debt. Then met coal prices started to fall. Walter Energy would be better off without excess production capacity and without debt. Unfortunately for the company, it needs a time machine to change that. Refinancing could be a smart move, if the company is able to get affordable terms.

Walter Energy, Inc. (NYSE:WLT) has had success in reducing costs. Cash costs of sales were improving from quarter to quarter. This is surely positive for the company, but at current prices, it is not enough to change the fate of the stock. Walter Energy needs higher met coal prices.

Are other coal miners better?

When natural gas prices went past $4 to $4.50, hopes started to emerge for thermal coal. As of now, natural gas is once again trading below $4. Cheap natural gas makes it harder for thermal coal to fight for consumers. In addition to that, thermal coal is not environmental friendly and faces constant pressure on this front.

The prospects for miners who have thermal coal in their portfolios is bleak too. Only Peabody Energy Corporation (NYSE:BTU) is expected to end the year with a profit. The stock is trading at a 13 P/E, but it is hard to predict whether the company will meet estimates or not. In addition to that, estimates are constantly revised. During the last 90 days, estimates for Peabody’s full-year 2013 performance have fallen by 70%.

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