Coal Industry Rebound To See Alpha Natural Resources Soar

Aug.13.13 | About: Alpha Natural (ANRZQ)

Alpha Natural Resources (ANR) has been struggling to deliver a healthy financial performance for the last couple of quarters now due to soft coal demand. However, I believe ANR remains a good investment option given the fact that the company is trading at depressed valuations, has undertaken cost-cutting initiatives, is lowering its production in reply to weak coal demand, and has a strong liquidity position.

Industry Overview
The coal industry has been facing tough business conditions for the past year, primarily due to excess coal supply, lower natural gas prices and weak economic conditions. However, I believe coal prices will recover as coal producers are curtailing their production. Also, coal consumption in the U.S. has increased YTD, mainly due to power producers, which will benefit the coal industry in the near term. I think coal markets will rebound as production cuts and higher coal consumption in the U.S. bode well for the industry. You can view my previous article, "I Remain Bullish On King Coal" for details on production cuts and rising coal demand in the U.S.

Financial Performance
Due to tough market conditions, ANR has been unable to post a healthy financial performance in recent times. Earlier this month, the company reported a loss of $185 million for 2Q2013. The company reported a loss per share of $0.59, in line with analysts' consensus estimates, as compared to a loss of $0.33 per share in the corresponding period of last year. Earnings for the quarter were adversely affected by lower coal margins per ton. Total revenues dropped by 28% YoY to $1.3 billion in the recent second quarter. Total reported revenues sank due to weak coal demand and lower prices.

The company experienced a drop in sales volume and its average selling price in 2Q2013. The total sales volume decreased by almost 20% YoY to 21.6 million tons in the quarter. The weighted average sales price dropped to $52.1 per ton in the quarter, representing a decrease of 10% as compared to 2Q2012. As a result of weak sales volume and pricing, adjusted weighted average coal margin per ton reduced to $3.9, as compared to $8.16 in the second quarter of 2012.

A positive note to take away from the recent quarter earnings release was that ANR contracted for an additional 2.6 million tons of met coal at a price of $92.4 per ton. On average, analysts were expecting ANR to get a contract price of $85 per ton.

Keeping in view the weak coal market conditions, the company slightly lowered its 2013 guidance. For the full-year 2013, ANR guided its total volumes down to 83-91 million tons, as compared to a prior guidance of 83-93 million tons. The met coal guidance was decreased minimally to 19-21 million tons from 19-22 million tons. Also, the company anticipates the Eastern thermal coal sales volume to be in a range of 27-30 million tons, and the Western thermal coal sales volume to be in a range 37-40 million tons for 2013.

The company increased its 2013 cost guidance for the Eastern operations by $3 per ton to $72-$74 per ton, due to issues at its NAPP mines. However, the company lowered its Western operations cost guidance by $0.25 per ton to $10-$10.5 per ton. Moreover, in order to strengthen its balance sheet in the prevalent difficult business environment, the company lowered its CAPEX guidance to $275-$325 million, from the prior guidance range of $300-$350 million.

The company has a strong balance sheet among its peers. ANR ended 2Q2013 with approximately $1.9 billion in liquidity, including $1 billion in cash and marketable securities. In the prevailing market conditions, ANR is expected to burn cash; it spent almost $63 million on CAPEX while generating only $2 million in operating cash flow in 2Q2013. However, ANR's strong liquidity position provides a cushion to survive the downturn in the coal industry. ANR further strengthened its financial flexibility after issuing convertible bonds during the quarter, which extended a part of its equity-linked debt maturities by 2 years. Also, the company has been reducing its CAPEX, which will positively impact the company's liquidity position. Moreover, the company does not have near-term bankruptcy risk, as there is no long-term debt maturity until 2015.

I believe ANR has the ability to benefit from an upside in coal demand and pricing. The company is trading at depressed valuations, with P/S of 0.19x and P/B of 0.23x, which make it a good investment option to play a coal market rebound. Also, ANR has a strong liquidity position and is committed to preserving its liquidity and maintaining its financial flexibility.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.