Alpha Natural Resources (ANR) has encountered an abrupt decline in its stock price from the beginning of 2013. Year-to-date, the company's stock price has declined nearly 34%. The bearish outlook on the coal demand in 2013 is one of the primary reasons for the downfall. Besides this, the supply of coal has far exceeded the demand in the current year, which has worsened the scenario. The overcapacity in the coal market has made the company cut back its production. However, the sentiments are expected to improve in the upcoming years. Let's see what lies ahead for the metallurgical and the thermal coal market.
Metallurgical coal contributes more than 50% to the total revenue of Alpha. In 2Q 2013, it contributed $565 million out of the total revenue out of $1.1 billion. An asymmetry in the demand/supply has pressurized the market price of metallurgical coal, due to which Alpha has committed almost 88% of its metallurgical coal production at a price of $102.20 for the remaining 2013 as compared to an average realization price of $125.13 in the corresponding period of the last year. However, the market pundits expect the demand/supply disproportion to be counterbalanced in 2014 owing to an increase in the demand for steel globally.
World steel association expects the global steel demand to grow by 3.2% in 2014 and reach to 1500 million metric tons from an estimated 1,455 million metric tons in 2013. Alpha expects its current year metallurgical coal production to be in the range of 19 million to 21 million tons. On the back of increased demand for steel, the company's metallurgical coal production is expected to rise in the next year. On the other hand, as Alpha has committed its metallurgical coal production at a price of $102.20 per ton for the remaining 2013, the expected increase in the demand for steel should enable it to bargain a comparatively better price than $102.20 in 2014.
Alpha's EBITDA decreased by $42 million in the 2Q' 13 on a sequential basis. It reported an EBITDA of $76 million in the 2Q as compared to $118 million in the 1Q, on similar revenue of $1.1 billion. The decrease of $42 million in EBITDA was due to an increase in the cost of sales per ton. One of the primary reasons that led to an increase in cost of sales per ton was the issues that the company faced in its Cumberland mine. In the mid of July, the company reported that the production in its Cumberland mine has been completely stalled. It was only on Aug 15, that the company recommenced its production and started shipping coal from this mine. Due to the production stoppage for over a month, the company's cost per ton will further increase in the 3Q.
Secondly, environmental issues continue to haunt the use of thermal coal. President Obama's continued focus on mitigating the environmental effects of conventional coal through cleaner coal technologies had adversely affected the coal producing companies. Further, the restrictions imposed by the U.S. environmental protection agency on carbon emissions can bring down the future demand of thermal coal in the U.S. This comes at a time when the EIA expects the generation of electricity in the U.S. to increase by 0.5% in 2013 and 0.4% in 2014. The possible decrement in the demand of thermal coal can push Alpha to abate its steam coal production in the next few years.
Also, the Chinese market remains a key watch for all the major coal producing companies. As China consumes more than 50% of the global coal production, the coal companies rely heavily on the Chinese economy. Under China's 12th five-year plan, it was estimated that the country's coal consumption will reach to 3.9 billion tons by 2015. This level was breached in 2012 itself as it consumed 4.05 billion tons of coal. The consumption of coal is expected to stabilize around 4 billion tons over the next few years, thereby signaling no major increase in the demand for coal.
Alpha's stock price is on a consistent downtrend from the beginning of 2013. The oversupplied coal market has not allowed Alpha to mark down a better price for its production. This also led to an announcement of major production curtailments. However, with the improving sentiments in the steel industry across the globe, the company should be able to increase its metallurgical coal production and charge a better price per ton in the next year. Also, as the company has resolved the issues in its Cumberland mine, the production in the area will hike up and the company should be able to increase its shipments. On the other hand, the weakness in the thermal coal market will nullify any increase in profitability that the company experiences through a better metallurgical coal market. Therefore, based on the company's operation, its stock price should stabilize at the current level.
Now, let's have a look at what the fundamentals of the company say.
The expected revenue in 2013 is as follows:
Number of tons
Average Price per ton
Metallurgical coal Shipments
Eastern steam coal shipments
Powder river basin coal shipments
Therefore, the revenue expected in 2013 = 2042.8+1785.8+486.6
= $4,287.24 million.
Similarly, for the cost of coal sales:
Number of tons
Average cost per ton
Powder river basin coal
Therefore, the expected cost of sales for 2013 = $3,589 mn + $385 mn
= $3,974 mn.
Based on the above calculation, the income statement of Alpha stands as:
Cost of sales
Selling, general & administrative
Depreciation, depletion & amortization
Profit before taxes
Amounts in millions.
Therefore, the company's expected PBT for 2013 is $(976.76) million in comparison to a PBT of $(2,987) million in the last fiscal. A higher loss in the last year was because the company reported a non-recurring expenditure of $2,782 million as compared to an estimate of $900 million in the current year. keeping aside the effect of non-recurring expenditure, Alpha will be able to reduce its loss by $128.24 million in the current year.
Currently, with an expected revenue of $4,287 million and 220.95 million equity shares outstanding, Alpha's stock is trading at a P/S multiple of 0.33. If this is compared with the P/S multiple of 0.28, for which it has traded in the trailing twelve months, there can be a further decline in its current market price. Based on the P/S multiple of 0.28, its stock should trade at a price of $5.43.
The outlook on metallurgical coal demand looks bullish. The increase in the demand for steel will certainly ask for a hike in the production of met coal. On the contrary, the demand for thermal coal can decrease because of the restrictions imposed by the U.S. environmental protection agency on the coal fired plants. On a net basis, Alpha looks like a mixed bag for the moment. The increase in the demand for met coal will improve its profitability, but that will be suppressed by the falling demand in the thermal coal market.
Turning to valuation, on the basis of the expected revenue in 2013 and the P/S multiple at which it is currently trading, a downside of $0.91 is possible from its current market price of $6.34 in 2013.
Note: All figures used are company's estimate.