Though coal could not be more hated and analysts expect years of losses at Alpha Natural Resources (ANR), this might actually be the time for the stock. As written last month (see Is The Coal Supercycle Back?), the coal super cycle could be intact so investors need to keep an eye on this sector.
The world's third-leading producer of metallurgical coal faces a tough road ahead due to pricing impacted by structural changes for CAPP thermal coal and weak global demand for metallurgical coal. As with any commodity, the market can be very cyclical and volatile providing opportunities to invest at periods of severe weakness.
The company has been in a continuous restructuring mode for several years now allowing it to dramatically reduce costs for the next up cycle. Now might be the time to move back into Alpha Natural.
Q1 2013 Highlights
The company provided the following highlights for Q1 2013:
- Revenue plunged to $1.3 billion down from $1.9 billion in the year-ago quarter.
- Adjusted EBITDA dropped to $113 million from $210 million in the year-ago period.
- The company generated $21 million of free cash flow after capital expenditures of $44 million.
- Metallurgical coal shipments were 5.1 million tons, compared with 4.9 million tons in both Q112 and Q412.
The encouraging sign is that the all-important metallurgical shipments increased slightly over the prior periods. The bad news is that occurred at substantially lower prices of $103 per ton from $146 in the year ago quarter.
Updated Credit Facility
The company just announced an updated credit facility that provides increased liquidity and financial flexibility to help it through the current crisis. Some of the benefits:
- Increased the total amount of the facility to $1.725 billion from $1.6 billion.
- Relaxation of the interest coverage ratio from 2.25 times to 1.50 times through 2013, from 2.50 times to 1.50 times during 2014 and from 2.50 times to 2.00 times from 2015 through the maturity date.
- Minimum liquidity requirement reduced from $500 million to $300 million.
Focus On Reserves
Typical of the markets, investors place too much emphasize on the short-term revenue and pricing of a commodity and not the long-term potential of the reserves held by a corporation. In the case of Alpha Natural, the company has a massive reserve base with approximately 4.5 billion tons of coal, including an important 1.5 billion tons of metallurgical coal. See slide below from a recent presentation:
As noted, those met coal reserves accounted for 44% of the revenue mix in 2012.
For comparative purposes, Peabody Energy (BTU) has reserves of approximately 9.3 million tons with a smaller level of metallurgical coal. Peabody though has nearly 4x the market value at $5.7 billion.
More importantly, BRIC nations are forecast to grow met coal demand in the decades ahead. Alpha Natural will be in the sweet spot of the increased demand from countries such as India.
With the sell-off on Wednesday, the stock sells for $7, which has been in the middle of the range for the last couple of months and near the low end of the range for the last year. The stock traded in the $40s about 2 years ago providing the upside potential if the coal super cycle returns as presented by Peabody Energy.
The below chart highlights the large losses by Alpha Natural over the last year:
While the met coal reserves and production makes the stock a play on the global demand for steel, the company still obtains roughly 50% of revenue from domestic steam coal used for electricity. As such, the pricing of natural gas will be key in the short-term for Alpha Natural. The increased price of gas and low drilling levels should help in the short term. In the long-term though, the higher availability of shale gas could impact demand as utilities switch toward the cleaner fuel.
In the end, the global demand for coal should only increase contrary to the general market sentiment. Investors need to consider the ultimate global potential especially with domestic coal stocks trading at multi-year lows. The time to buy Alpha Natural appears to be now.
Disclosure: I am long ANR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.