James River Coal Company (JRCC) has had a tough time over the past couple of years. Like other coal companies, it has suffered as the coal industry has declined, and has faced a real risk of bankruptcy as it continued to lose money every quarter. But upon releasing its recent Q1 2013 results, JRCC stock had a substantial run from the mid $1s up to well above $2, which strongly suggests that the results were better than expected. JRCC was still very far from being profitable in Q1 2013, but as large losses were expected, in this case any loss less than about $60 or $70 million was likely to improve the stock a little. And JRCC's loss in Q1 2013 was substantially lower than its loss in Q4 2012.
Total net loss for JRCC in Q1 2013 was $42.1 million, compared with a net loss of $76.9 million in Q4 2012. As of March 31, 2013, JRCC had total available liquidity of $107.2 million, compared with available liquidity of $135.9 million at the end of 2012. While it would seem that JRCC would not be able to continue much longer, it must be noted that one of its main expenses is depreciation, depletion and amortization, which came in at $28,537,000 in Q1 2013. If we focus instead on cash flow only, we can see that total coal sales revenue for Q1 2013 was $175,933,000, with a cost of coal sold of $163,383,000.
Regarding the quarter, JRCC CEO Peter T. Socha commented as follows:
Our mining operations had an excellent quarter. As previously discussed, they have substantially completed a major restructuring of all mines and support services. We are now beginning to see the results of this process in both coal production and costs… Lastly, we are continuing to evaluate a wide variety of options to improve our liquidity and strengthen our balance sheet. We are very grateful for the large number of holders of our debt and equity securities that have contacted us to discuss their thoughts and suggestions.
The main takeaways from JRCC's recent results are as follows:
- JRCC has continued to restructure its mine operations, in a much-needed attempt to reduce costs and better manage its cash flows. Most of the restructuring took place in Q4 2012, but continued in Q1 2013. Management obviously realizes the importance of reducing costs to keep the company afloat, and the restructuring so far has led to reduced quarterly losses. Coal mining costs were reduced significantly in Q1 2013.
- The market outlook for thermal coal in the United States appears healthier than it did a couple of months ago according to Peter Socha, whereas the market for metallurgical coal is perhaps not as certain (this is attributed to the economic situation in Europe). JRCC has very high revenue and cost of revenue numbers compared with its current cash reserves and market cap. Therefore, small changes in the market demand and price for coal can have a big impact on its profitability. A few different situations have been analyzed in the past regarding the future of the coal industry. Some are bullish on the market and believe a rebound is likely, while others argue that the emergence of cheap natural gas and alternative energy will result in the death of the coal industry.
- As JRCC is still in some danger of bankruptcy, management is looking into options to improve its liquidity, and has received input from numerous shareholders and debt holders. One thing mentioned in the conference call is that JRCC management wants to issue more shares in order to raise capital and improve its liquidity. With the current Nasdaq 20% rule, management is limited to just 20% of outstanding shares that it can raise capital with (for JRCC this is about 7 million shares, which would have a limited effect). A proposal has been made for more shares to be issued in order to raise capital, and shareholders are able to vote on the proposal.
JRCC management appears to be making some sensible decisions, and the decline of JRCC over the past few years cannot be attributed to how the company has been run, but rather the state of the coal industry. Future coal prices will continue to be the main factor determining whether JRCC can stay afloat. In an absolute best-case scenario (where both thermal and metallurgical coal prices rise substantially) we could see JRCC become profitable in the years ahead, while a weakened coal industry will result in further losses regardless of what decisions management makes. JRCC may therefore be regarded as a speculative, high-risk and high-reward investment for those who believe coal prices will increase in the future.