Alpha Natural Resources: A Good Company In A Horrible Market

| About: Alpha Natural (ANRZQ)

I'm going to do something I could never do while I was an analyst at a hedge fund. I will tell you that a company is a BUY, but I won't say at what price or when. The company in question is Alpha Natural Resources, (ANR). The reason I have great difficulty in saying that ANR is a BUY today, or at say $11 per share, is simply because coal fundamentals remain horrible.

Having said that, I'm on record as saying that a lot of bad news is priced into the coal stocks. Last week the coal stocks fell so severely that I wrote an article suggesting that it was time to go long selected names. ANR, Walter, (NYSE:WLT), Consol, (NYSE:CNX), Peabody, (BTU) offer good risk/reward, but in today's risk-on, risk-off markets, trading volatility will remain high.

I hate to say it, but the negative headlines out of Europe will be with us for a long time. Therefore, a coal stock rally will probably not be in a straight line. I like ANR over the medium- to long-term because it will be among the best positioned to thrive once coal fundamentals return to health. The reason I write this article now is that this week Alpha's management team is traveling in Europe on a non-deal road show. It is getting in front of investors and telling the company story.

The story is a good one, again over time. Last Friday, ANR posted its latest company slide presentation (pdf).

Globally, Alpha is the 3rd-largest producer of coking coal and the sixth largest overall. In 2011, 44% of revenue came from exports. Exports are the way forward as ANR has the most port capacity of any U.S. producer at 35-40 million tons. Alpha has customers on 5 continents and last year shipped 7.1 million tons to Europe, 3.5 million tons to Asia, 2.0 million tons to Africa/Middle East, 2.0 million tons to Canada/Mexico and 1.7 million tons to South America.

Importantly, Alpha has solid liquidity of $1.8 billion, of which $700 million is cash., and no near-term debt maturities. Net debt of about $2.5 billion and average EBITDA of close to $1 billion over the next few years equates to a Net Debt / EBITDA ratio of ~2.5x. While James River, (JRCC), Patriot, (PCX) and Arch Coal, (ACI) are burning cash, or roughly break even in Arch's case, Alpha has been free cash flow positive for the past five years and will continue to generate in the hundreds of millions of free cash flow going forward.

An aspect that some investors may not be aware of is that the company has a $500 million share buyback plan in place. It has not bought back any shares this year. With the stock near $11 per share, $500 million is some serious dry powder. In fact, at current prices, $500 million would retire ~20% of the outstanding shares! As coal fundamentals stabilize, Alpha's $700 million in cash, $1.1 billion of available borrowing capacity and positive free cash flow will allow for significant share repurchases.

It's important to touch upon the company's 4.7 billion coal reserves, of which 32% or 1.5 billion tons are coking coal. This really speaks to Alpha's ability to bounce back strong when market conditions improve. The company has six organic coking coal projects that could ramp up to a total of ~ 7 million incremental tons per year over time.

Alpha has taken the opportunity of a horrible market to accelerate the rationalization of its mine portfolio, closing high-cost mines and shifting employees and equipment to lower-cost mines. Alpha has announced plans to cut 18 million tons of production this year and $225 million of cap-ex. These activities have enabled Alpha to reiterate its target of $220 -$260 million of run-rate synergies by mid-2013. This compares with the initial target of $150 million.

Bottom line, Alpha is not only a survivor, but it will be well positioned to bounce back with the coal market. If a turnaround in fundamentals takes a long time, Alpha can be patient as it has significant liquidity. If industry-wide exports continue to be strong, Alpha will benefit as much or more than any other U.S. producer. Investors can pick their own entry point, but to the extent that one wants exposure to the coal sector, Alpha Natural Resources is a good medium-term to long-term bet.

Disclosure: I am long ANR, WLT, OTCPK:CLNMF.

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