pete123's  Instablog

1. Thesis of guaranteed BK this year busted. The drastic step of pulling the plug on 3MM tons capp capacity (close to half capp thermal capacity, close to a third of overall capp operations), buys them several more quarters of "runway". Although this bird may never fly this is still a significant achievement. However, per conf call, reading between the lines a bit, it seems the full range of restructuring options is now on the table, and professional advisors have been brought in.

2. change in strategy: admission that the old strategy of continuing operations in expectation of market turnaround is no longer viable. New strategy appears to be cash conservation as the #1 priority.

3. additional costs for ops slowdown probably incurred in 2013Q1. Hard to believe you can pull the plug withput paying some kind of penalty. As mentioned in conf call, mix will be half met, which increases both revenue per ton and cost per ton.

4. will they even participate in the capp thermal market for 2014? since their new strategy is cash conservation, and their capp thermal operations have needed around $80 / ton to make a profit, it may be logical to produce little or no 2014 thermal at all (except as a side effect in capp mines whose production is a mix of predominantly met and some thermal). In other words, more "shrinking your way to profitability" as the year goes on. Surely this would be equivalent to a restructuring. Also worsens leverage ratios, although credit really can't get any worse at this point.

5. asset impairment triggered by drastic change in revenue coming from the assets? Maybe. I wish I knew the timing to this one. Guess is that it is probably avoidable or at least can be delayed until the end of the year. Since so much of the US thermal coal industry is "underwater" at the moment, the standard for when you have to do an asset impairment is probably pretty low. However, if the a recalculation of long term asset value is triggered, it is quite bad because:
5a. some capp thermal assets may be out of the money for good, and may never see the light of day, requiring total writeoff.
5b. higher interest rate due to bad credit means NPV calculation results in severely discounted present value

6. other effects of bad credit continue to kick in: surety bonds used to move environmental and worker obligations off balance sheet may go up in cost or become unavailible. trade terms with suppliers may tighten and require tying up more cash rather than using accounts payable.

7. who is driving the boat? pretty safe to say they're in the zone of
insolvency, and escaped BK for the year only by drastic measures. 136MM left, burn rate 60-80 per year? According to Raymond James, they face cash issues in 5 quarters. Is it at all reasonable to expect them to be profitable by then? would have to improve credit rating enough to refinance 2015 convertibles, this is even less likely. The company might no longer be managed in the interest of the equity holders.

8. Met coal price recovery has been coming into question and/or stalling for last 3 weeks, per China PBOC tightening action, steel prices, and global met coal prices.

Disclosure: I am short JRCC.

here I am using a cashflow-like figure which is essentially

operating income - minus DD&A + capex + interest expense.

this filters out investment activity, and the timing effects of accounts payable/receivable and so forth. These get washed out pretty quickly over time.

----------------------------------------------

time / cashflow like figure $MM / liquidity at end of quarter $MM

2012q3: -27.5 with 172 left

2012q4e: -44 with 128 left > we are here now

2013q1e: -38.5 with 89.5 left > likely point of no return. time to shop around for new management and a good law firm

2013q2e: -32 with 56.5 left > time to prepare bankruptcy paperwork

2013q3e: -32.5 with 24 left > time to file

2013q4e: -29.5 with 0 left

also, now (end of jan 2013), nearly all the 2013 pricing for thermal is locked in, so JRCC investors can completely stop looking at the thermal market. All it takes to get the numbers above is a moderate met recovery (i.e., recover by the end of 2013 from met prices of 2012q4 halfway back to the peak met prices jrcc was able to get at its best). that scenario is what's above, i think it's actually a bit optimistic.

Finally, note that JRCC, due to its weak situation, requires permission of senior bondholders to borrow money, raise capital, or try to sell anything. and even if it wanted to raise debt, subordinated debt is trading at 40% yield, so forget about borrowing anything!

super drastic cutting of operations and capex might become forbidden too as the liquidity runs out, since it would be a sort of willful destruction of what can reasonably be expected to soon become the bondholder's property.

i'm sure management has one or two more tricks up their sleeve so I want to give them an extra quarter for that, beyond what's above. but probably this year is it.

finally, if anyone reads this, playing this name in either direction is definitely in the playing-with-fire category of investments.

Disclosure: I am short JRCC.

selected coal company earnings dates:

BTU Jan 29
ACI Feb 5
ANR Feb 14
CLD Feb 13
CNX Jan 31
Cerrejon (owned by BHP, Anglo American, Xstrata)
ARLP Jan 29
EFH privately held, Feb 15?
Kiewit (privately held)
NC Mar 6
PCXCQ (in bankruptcy)
Murray Energy (privately held ?)
WLB Feb 25
BHP Feb 19-20
WLT Feb 20, but already disclosed pricing and volume
JRCC Feb 25

---

key bit from WLT: "Reflecting current trends in global coal markets, Walter Energy's met coal prices for the fourth quarter of 2012 averaged approximately $152 per metric ton (MT) for hard coking coal as compared with $198 per MT in the third quarter of 2012. The fourth quarter prices for low-vol PCI averaged approximately $129 per MT as compared with $160 per MT in the third quarter of 2012. " I.e., a 20% drop, at least in the high quality stuff.

2012q4 Thermal prices were already locked in, so won't be any surprises there. 2013 pricing looking bleak but that is well known.

Finally, according to the american association of railroads, 2012 coal tonnage is down by 15% vs 2011, and so far into this year the trend has yet to turn back up. ( source1(pdf page 16 bottom left chart) , source2 )

I don't think it's going to be pretty.