Alpha loses money in Q1, slashes U.S. steam coal sales outlook

Like other coal producers responding to a slack domestic market, Alpha Natural Resources (NYSE: ANR) said May 3 that it is cutting coal production this year, and now expects steam coal shipments out of the Powder River Basin in 2012 of 42 million tons to 48 million tons, compared to the previous range of 45 million tons to 51 million tons.

Alpha said in its May 3 earnings statement that it now expects to ship between 20 million tons and 24 million tons of Eastern metallurgical coal, compared to the previous range of 20 million tons to 25 million tons. Eastern steam coal shipments in 2012 are now expected at 38 million tons to 44 million tons, against a previous range of 42 million tons to 48 million tons.

“Alpha responded swiftly to challenging market conditions, reducing planned 2012 production volumes by approximately 4 million tons based on actions announced in early February,” said Alpha CEO Kevin Crutchfield. “Since then unusually mild winter weather and decade-low natural gas prices have significantly reduced domestic steam coal consumption and driven utility inventories to near record levels. In response coal producers continue to announce plans to reduce production. Alpha plans to introduce additional production adjustments in the near future. Accordingly, we are reducing the midpoint of our 2012 shipment guidance by an additional 7 million tons of steam coal. The market for metallurgical coal has also softened somewhat, particularly for lower-quality metallurgical coals, due to increased global supply and a geographically mixed demand picture. In response, we are reducing the midpoint of our shipment guidance for metallurgical coal by 0.5 million tons. In this environment, Alpha will remain focused on selectively pruning our portfolio, controlling costs, and maximizing free cash flow generation.”

Crutchfield added that Alpha has made major progress with the integration of the Central Appalachia mines of Massey Energy since a June 2011 acquisition of Massey. He said that among other things, safety performance and employee retention at those ex-Massey operations have markedly improved. Alpha ended the first quarter of 2012 with an annual synergy run-rate of greater than $150m, and continues to target annual recurring synergies of $220m to $260m by mid-year 2013.

Following the Massey transaction, Alpha is now among the top three leading global suppliers of metallurgical coal and controls more export terminal capacity than any other U.S. producer. As market conditions improve, Alpha is well-positioned to capitalize on strengthening global demand for met coal, Crutchfield noted.

Export market hits downdip, U.S. steam coal market plunges

“Following a year of record-high metallurgical coal pricing in 2011, the market for metallurgical coal experienced a period of relative weakness in the opening months of 2012,” Alpha reported about overall market trends. “Recent data suggests that pricing has stabilized for premium, benchmark quality coals in Asia due to Chinese steel production that rose four percent in March to an annualized rate of approximately 725 million metric tons and labor and weather-related supply disruptions in Australia. However, European steel production is pacing below 2011 levels, and demand and pricing in the Atlantic basin remain challenged relative to the markets in Asia, particularly for lower quality and blended products that comprise the bulk of U.S. export products. While the export market for U.S. metallurgical coal has been under pressure recently, the market appears unlikely to deteriorate further and may strengthen in coming quarters, depending upon a host of variables, including expected continued growth in Asian steel production, any further supply disruptions in Australia, expected gradual economic recovery in Europe, and potential additional cutbacks in U.S. production of lower quality coking coals.”

Demand for domestic thermal coal has dropped in recent months due to the effects of a mild winter that cut into utility coal burn and extremely low natural gas prices which have also reduced coal burn by domestic utilities. Utility inventories are approaching record levels and have grown rapidly to greater than 200 million tons nationwide. Based on today’s natural gas prices, coal-to-gas switching has expanded from the East, where it has been a fairly common phenomenon, into areas served by PRB coals, which due to their cheapness have been relatively immune from switching.

Requests for coal shipment deferrals have become commonplace in all regions, and spot pricing is below production costs for much of Central Appalachia and certain PRB operations, Alpha noted. In light of higher inventories, some thermal coal shipments have been re-sold either to other utilities or to traders with some of the coal ultimately moving into the seaborne market. Producers are trying to maximize exports in order to place thermal coal production, and seaborne thermal coal exports from the U.S. have increased significantly in the first quarter of 2012.

Announced production cutbacks to date by U.S. coal producers are in the range of about 50 million tons annually and additional reductions appear necessary to balance supply and demand. Markets for both met and thermal coal are under pressure, but the challenges facing the met market appear to be cyclical and could reverse quickly, Alpha noted. The challenges facing the domestic steam market, on the other hand, appear to be both cyclical and structural and are likely to linger well into 2013.

As of April 20, 2012, 78% of the midpoint of anticipated metallurgical coal shipments in 2012 were committed and priced at an average per ton realization of $146.31; 99% of the midpoint of anticipated Eastern steam coal shipments were committed and priced at an average per ton realization of $66.78; and 100% of the midpoint of anticipated PRB shipments were committed and priced at an average per ton realization of $12.83.

Alpha’s expected range for the cost of coal sales per ton in 2012 is $75 to $79 in the East, compared to the prior guidance range of $72 to $77. The increase in Eastern cost of coal sales per ton is due to the reduction in expected shipment volumes and a mix shift with proportionally more met and less thermal coal shipments. The expected range for the cost of coal sales per ton in the West is unchanged at $10.50 to $11.50.

Anticipated capital expenditures for 2012 have been reduced by $100m to a range of $450m to $650m, compared to the prior guidance of $550m to $750m.

Eastern shipments in 2012 include an estimated 2 million to 3 million tons of brokered coal per year. The 2012 shipment range for Eastern steam coal reflects the impact of longwall moves at the Cumberland mine in Pennsylvania in April and at the Emerald mine in Pennsylvania in March, as well as anticipated longwall moves at Cumberland in September and at Emerald in November/December.

In 2012, committed and unpriced Eastern tons include about 3.4 million tons of met coal subject to market pricing, approximately 0.1 million tons of steam coal subject to market pricing, and approximately 0.3 million tons of steam coal subject to average indexed pricing estimated at $65.89 per ton.

Alpha reported a first quarter net loss of $29.1m compared to net income of $49.8m in the year-ago quarter, before the Massey acquisition. Alpha sold 28.1 million tons of coal in the first quarter, down from 31.1 million tons in the fourth quarter of 2011. It sold 21 million tons of coal in the year-ago quarter, before the Massey acquisition.

With $7.1bn in total revenue in 2011, Alpha ranks as America’s second-largest coal producer by revenue and third-largest by production. Alpha is the nation’s largest supplier of metallurgical coal used in the steel-making process and is a major supplier of thermal coal to electric utilities and manufacturing industries.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.