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Thoughts About The Seaborne Met Coal Market

The 2q benchmark coking coal price just settled between the Australian miners and their asian buyers at U.S $109.50 per ton. Selling at this price, virtually all big miners would not be making any money. The Australians have a bit of a reprieve in that over the course of the year their dollar has depreciated vs the American dollar from the mid .90s to roughly .75 per U.S dollar. So essentially, if the benchmark for low volume coking coal is 109.50 U.S dollars, the bhp's of the world sell their coal to Asia at $136.87 Australian dollars. Essentially the depreciation of the Aussie dollar has kept the bigs in Australia minutely cash flow positive. In my opinion the two main ingredients in the steel making process are in two different phases of the cycle. While there has been massive iron ore expansion as well as coking coal expansion out of Australia starting in 2011, the breakeven points for both products by the miners are at different places. We have gotten to the point where without currency manipulation there is no more breathing room in the coking coal market. The big miners are still producing great margins in iron ore with a cost per ton of around $20.00 dollars. Thus, I believe we have reached a bottom in the seaborne coking coal market as production of some 30 million tons are coming off the market at the moment.

The significance and relevance of this for U.S coking coal miners such as Alpha Natural is very important. At these prices and with a debt maturity due of 154 million in 2015, the U.S miner will burn around 465 million for the year. Which will leave it with 800 million roughly in cash equivalents and a total liquidity of somewhere around 1.7 billion going into 2016. Most all 30 million ton production cuts should take affect in the market by the fall. With the likelihood of a few more cuts coming this year, the price for low volatility met coal should start to creep up by years end as supply and demand come to equilibrium.

With ANR stock trading a little under a dollar, the market seems to think the miner is going bankrupt. If the Australian dollar stays where it is and met coal prices don't move up, ANR should have enough liquidity to last until their debt payment in December 2017. Let's say the Australian dollar was trading at .90 cents to the U.S dollar. At these prices and selling 15.5 million tons of met coal per year, ANR would add 212.08 million ebit per year which would put a huge dent in their cash burn. If the met coal price goes up a meager $15.00 per ton and the aussie dollar corrects to .90 per U.S dollar and ANR sells 15.5 million tons per year, $444.58 million in gross margin per year is added. This scenario makes the firm just about cash flow breakeven. This outcome would allow them to refinance their debt, and I believe send their stock price much higher.

Over time met coal prices will improve, but the long term fate of U.S export miners is tied to the appreciation of the Australian dollar.

Disclosure: The author is long ANR.