Walter Energy takes $1.1bn loss as it adjusts to tough coal market

Walter Energy (NYSE and TSX: WLT) had “encouraging” operational results in the third quarter as it improved metallurgical coal production, but the still-tough international and domestic markets for coking coal mean further belt tightening is in order.

Walter on Nov. 5 reported a net loss of $1.1bn in the third quarter, including non-cash impairment charges. It had third quarter revenues of $612m and Adjusted EBITDA of $117m. Walter’s adjusted net income was $30m in the quarter, excluding impairment charges. It produced 3.33 million tonnes of metallurgical coal, up 47% from third quarter 2011.

Revenues of $612m in the third quarter of 2012 were down from $689m in the third quarter of 2011 due principally to lower pricing and softening world demand. The $1.1bn loss includes estimated non-cash goodwill impairment charges of $1.1bn primarily related to the 2011 acquisition of Canada-based Western Coal and a charge of $40m associated with the abandonment of a natural gas exploration project.

“Our operational results in the third quarter were encouraging as we improved metallurgical coal production 14% as compared to the second quarter, while lowering cash costs of production,” said Walt Scheller, CEO of Walter Energy. “However, the recovery in the global economy and metallurgical coal markets is uncertain. As a result we are focusing on achieving further cost reductions, tightly managing capital spending and reducing marginal production in order to improve our results and be well positioned going into 2013.”

Weak steel market demand cuts into coal sales

Third quarter of 2012 met coal sales volume including both hard coking coal (HCC) and low-volatility (low-vol) PCI was 2.62 million tonnes, or 8% less than in the second quarter. Sales were impacted by weaker worldwide demand and excess supply. HCC sales volume was 2.18 million tonnes in the third quarter of 2012 compared to 2.29 million tonnes in the second quarter. PCI sales volume was 0.44 million tonnes, down from 0.55 million tonnes in the prior quarter.

The average third quarter 2012 selling price of HCC (primarily low-vol and mid-vol) was $198 per tonne, which was slightly lower than the second quarter’s average price of $201 per tonne. The average selling price for low-vol PCI was $160 per tonne as compared to $164 per tonne in the second quarter.

Met coal production was 3.33 million tonnes in the third quarter of 2012, comprised of 2.37 million tonnes of HCC and 0.96 million tonnes of low-vol PCI. Met coal production increased 47% from the 2.27 million tonnes produced in the third quarter 2011 and was 14% higher than the 2.91 million tonnes produced in the second quarter of 2012.

Western Canadian operations increased production to a quarterly record 1.61 million tonnes in the third quarter of 2012, compared to 1.19 million tonnes in the second quarter. Weak worldwide demand for PCI coal, however, resulted in a significant increase in the company’s inventory levels in the third quarter. The company said it plans on reducing production and inventory during the fourth quarter.

Coal sales cash costs increase in latest quarter

The consolidated cash cost of sales for HCC was $122 per tonne in the third quarter compared to $115 per tonne in the second quarter of 2012. At the U.S. operations, in southern West Virginia and Alabama, the cash cost of sales for HCC increased to $119 per tonne in the third quarter, up from $107 per tonne in the second quarter.

The U.S. operations sold a higher proportion of higher-cost Mine No. 4 production out of Alabama in the quarter, which had a negative impact on cost per tonne. In Canada, the cash costs of sales for HCC decreased 2% to $142 per tonne in the third quarter of 2012, as compared with $144 per tonne in the second quarter of 2012.

Cash cost of sales for low-vol PCI decreased 16% to $183 per tonne in the third quarter of 2012 as compared with $218 per tonne in the second quarter 2012. The Willow Creek development mine represented 21% of the low-vol PCI production and had average cash cost of sales of $290 per tonne in the third quarter. Since the Willow Creek mine completed the majority of its development work in the third quarter of 2012, its costs are expected to decline materially going forward.

Walter Energy’s capital expenditures were $85m for the third quarter of 2012 and $331m for the first nine months of 2012. For 2013, the company currently expects capital expenditures of about $220m.

At the end of the third quarter 2012, available liquidity was $297m, consisting of cash and cash equivalents of $130m plus $167m of availability under the company’s $375m revolving credit facility.

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.