Alpha Natural Resources (NYSE: ANR), which like other coal producers has been hit hard by a slump in U.S. thermal coal demand, on Sept. 18 outlined plans to reshape its portfolio of operations to meet the evolving demands of a changing global coal market.
By early 2013, Alpha said it will be fully aligned to focus on two key strategic priorities: enhancing its metallurgical coal leadership position in both the domestic and international markets; and establishing a durable core of cost-competitive thermal coal assets better suited to supply structurally shifting power markets in the U.S. and tap into new thermal markets overseas.
Kevin Crutchfield, Chairman and CEO of Alpha, said: “With fundamental changes taking place in our business, we’re taking decisive actions that set the table for Alpha to compete successfully as a leader in the global coal markets for years to come. We’re taking a long-term view of the thermal coal market, and we believe there are solid opportunities for diversified suppliers like Alpha to produce and sell thermal coal profitably into a smaller domestic market and to customers in new markets overseas. At the same time we have a big opportunity to advance Alpha’s position as a premier supplier of metallurgical coal. Forecasts point to more than 100 million tons of increased seaborne metallurgical coal demand by the end of this decade, and persistent structural supply limitations exist on sources of high-quality metallurgical coal. We intend to participate meaningfully in the market upside with costs that are globally competitive.”
Key elements of the plan, to be launched beginning Sept. 18 and extending into early 2013, include:
- Rationalize higher-cost thermal coal production, creating a durable, sustainable thermal coal franchise:
- Alpha’s rationalization efforts focus on thermal coal operations that have a cost, customer or transportation advantage. Operations that have competitive cost positions and more stable customer demand – such as supplying baseload power plants and generating units that will survive a stricter regulatory regime – will supply the majority of the company’s U.S. thermal coal output.
- With the addition of a new international sales and trading function announced July 31, Alpha will also further develop its global marketing platform for its high-quality thermal coals.
- Mine and equipment idlings, production curtailments and mining out of reserves will take place through early 2013, reducing annualized coal production and shipments by about 16 million tons. About 40% of the reduction will come from higher-cost thermal coal operations in the East that are unlikely to be competitive for the foreseeable future. And about half of the reduction will come from production cuts in the Powder River Basin, where Alpha has the mid-Btu Eagle Butte and Belle Ayr mines, in order to match currently committed sales volumes. The balance will be reduced production of lesser quality met coal.
- Between now and early 2013 operational adjustments will reduce about 1,200 positions from the current workforce of 13,100 employees. The first of the planned reductions commence Sept. 18 with the idling of eight mines in Virginia, West Virginia and Pennsylvania. About 400 positions will be eliminated, with some employees having job opportunities elsewhere in the organization.
Plans to enhance Alpha’s international metallurgical coal business to capitalize on new opportunities include:
- Notwithstanding current market softness for metallurgical coal, new steel mills being planned or under construction in developing areas of Asia, South America and elsewhere mean long-term growth opportunities for Alpha. At the same time, there are persistent structural limitations globally on sources of high-quality met coal. With the most flexible logistics network, an outstanding reputation in the international marketplace and broad range of products, Alpha said it is well positioned to capitalize on new opportunities and is better protected from customer and country risk.
- As the third-largest supplier of met coal globally, Alpha has 25 million-30 million tons of export capacity through the East Coast and Gulf of Mexico which is partially untapped, giving Alpha the capability to scale up exports swiftly. With about 1.5 billion tons of quality met coal reserves, and a number of significant organic growth projects in various stages of development, Alpha said it is well positioned to scale up quickly as demand from steelmakers around the world warrants.
Efforts to streamline and optimize Alpha’s corporate structure include:
- To align with its smaller production footprint and reduce overhead, Alpha’s four existing operating regions will be consolidated into two. Executive and administrative support for the smaller number of operating properties within these units will be consolidated and proportionally scaled between now and early 2013, resulting in permanent overhead savings.
- With the June 2011 acquisition and integration of Massey Energy complete, and priorities addressed in the critical area of safety, Alpha intends to move aggressively to appropriately size overhead support groups to reduce costs and improve work processes, while providing functional support to the new operational footprint and structure.
- Alpha is establishing an Operational Performance Group (OPG) to provide centralized technical support services to both new operating regions. It will support the deployment of best practices across the organization in areas like operational improvement and predictive/preventive maintenance.
- Brian Sullivan, currently president of Alpha Australia LLC, will transfer back to the U.S. to fill the vacant position of chief commercial officer (CCO), a post held by Paul Vining before he was named Alpha’s President. Sullivan will be responsible for all global sales and marketing activities.
- Randy McMillion and Eddie Neely, both members of Alpha’s Executive Leadership team (ELT), will retire Nov. 1, 2012 as previously planned. Their responsibilities will be consolidated into the current duties of other ELT members and company executives.
- The company said it is still committed to its signature Running Right employee involvement program and proactive safety systems. By investing in both areas, Alpha will continue to improve employee safety and regulatory performance. Alpha has been working particularly hard since the Massey acquisition to repair Massey’s troubled safety program.
“The focus and shape of our company need to change to reflect our new business environment,” said Vining. “We must have a nimble operating model, superior cost management and an overhead structure that matches our streamlined operational footprint. We recognize these changes will impact our people, suppliers and communities in some areas where we operate. Alpha is committed to acting transparently and responsibly throughout the transition, with respectful consideration of our people and all other stakeholders.”
Financial impact and outlook related to these changes include:
- Overhead cost savings from the streamlining of field and corporate support functions are now targeted at around $150m, which includes the $50m to $60m of cost reductions Alpha announced on June 8.
- As the realignments are finalized over the coming months, Alpha will assess their impact. Operating and financial guidance for 2013 will be provided after the completion of detailed business planning for next year.
With $7.1bn in total revenue in 2011, Alpha ranks as America’s second-largest coal producer by revenue and third-largest by production.