Virginia-based coal producer Alpha Natural Resources (NYSE: ANR) said Feb. 14 that after a period of cyclical weakness in the global metallurgical coal market in the second half of 2012 during which approximately 30 million tons of uneconomic production was removed from the seaborne market, developments are beginning to point to gradual improvement.
Alpha, which relies heavily on the export market, said that Chinese coking coal imports rose 30% from November to December 2012, reaching a record 7.6 million tonnes in the last month of the year, and full year 2012 coking coal imports were a record 53.6 million tonnes, a 20% increase over 2011. China’s purchasing managers’ index (PMI) has been rising for several months and now stands at a 9-month high. Recently, tropical storms have hampered activity at Australian ports and disrupted rail shipments of this competing coal, although the impact is not as severe as the extreme weather events of early 2011.
In the Atlantic basin, European demand has been muted by economic headwinds, Brazil slowed its imports of coking coal somewhat in 2012, and U.S. demand has been generally stable. “As a result, for the last several quarters, the Atlantic market has been characterized by market weakness and over-supply, particularly for lower quality metallurgical coals,” Alpha said. “Currently the Atlantic basin remains disconnected from Asia where the impact of production cuts and strengthening demand have begun to spark gradual improvement in the met market. Spot transactions of Australian met coal in Asia have reportedly risen above the recent benchmark price, and are some 20 percent higher than the low point in the spot market in September of 2012. As the leading U.S. producer of metallurgical coal, Alpha expects to be well-positioned to benefit from an eventual recovery in the global metallurgical coal market, particularly in the Atlantic.”
In 2012, the U.S. market for domestic steam coal remained “challenging” due in part to the fourth warmest winter ever recorded, low natural gas prices and the long-term trend of coal-fired plant retirements, all of which contributed to reduced coal usage and led to record-high inventory levels that peaked at an estimated 213 million tons in the spring of the year. As natural gas prices have increased from their lows below $2 per MCF to a level in the low $3s, and with forward pricing hovering around the $4 mark, coal has recovered some of its market share, which bottomed at 32% of U.S. electricity generation and climbed back to about 38% by year-end, Alpha said. Due to the increased usage of coal in the second half of the year, along with production cuts estimated at around 100 million tons during 2012, utility inventories have started to retreat but remain elevated at around 197 million tons as of the end of 2012.
In light of the continuing weakness in the U.S. steam coal market, Alpha adjusted its shipment levels and implemented a restructuring plan.
- With respect to the Powder River Basin where it has two mines, Belle Ayr and Eagle Butte, Alpha has reduced its planned shipments in the near-term until elevated inventories eventually correct.
- In the East, Alpha’s Pittsburgh seam longwalls at the Cumberland and Emerald mines, with high heat content and relatively lower costs, are expected to produce an estimated 9 million to 10 million tons in 2013.
- In Central Appalachia, Alpha said it has idled or closed a number of higher cost steam coal operations in order to control costs and match supply with structurally diminished demand that has decreased markedly over the course of the last year. At the same time, Alpha more than doubled its Eastern thermal coal exports in 2012 to nearly 6 million tons, and the company plans to continue to build its export thermal franchise in 2013, and beyond.
Alpha expects to ship 81 million to 92 million tons during 2013, including 19 million to 22 million tons of Eastern metallurgical coal, 25 million to 30 million tons of Eastern steam coal, and 37 million to 40 million tons of Western steam coal out of the PRB. As of Jan. 25:
- 47% of the midpoint of anticipated met coal shipments were committed and priced at an average per ton realization of $113.25;
- 94% of the midpoint of anticipated Eastern steam coal shipments were committed and priced at an average per ton realization of $62.71; and
- 97% of the midpoint of anticipated PRB shipments were committed and priced at an average per ton realization of $12.84.
The company’s 2013 cost of coal sales is expected to range between $71 and $75 per ton in the East and between $10.00 and $11.00 per ton in the West. Capital expenditures for 2013 are expected to fall within the range of $300m to $350m.
Alpha was able to cut its losses in the fourth quarter
Alpha reported a fourth quarter 2012 net loss of $128m, with a net loss of $793m in the fourth quarter of 2011. Excluding impairment and restructuring charges, and other adjustments, the fourth quarter 2012 adjusted net loss was $41m compared with an adjusted net loss of $19m in the fourth quarter of 2011.
The company recorded $228m of impairment and restructuring charges in the fourth quarter of 2012, which are largely non-cash. These charges include $188m arising from Alpha’s annual goodwill impairment testing, which reflects projected coal market conditions and lower expected future production and shipments, particularly for thermal coal, as well as a $40m impact of charges and asset impairments arising from recent restructuring initiatives. The restructuring plan announced in September 2012 is now substantially complete.
“This was a pivotal quarter for Alpha and concluded a year in which we made tremendous strides across our strategic priorities. Alpha posted strong results in the fourth quarter, reporting adjusted EBITDA of $217 million primarily driven by our ability to control costs in both our Eastern and our Western operations,” said Alpha CEO Kevin Crutchfield. “We have also been executing well against our internal objectives, and the extensive restructuring initiative we announced in September is largely behind us. And while we do not expect the unit costs reported in the fourth quarter to be sustainable, we do expect to at least hold the line or slightly reduce our unit costs in the East this year compared with full year 2012, and we are guiding to a substantial reduction in SG&A expense for full year 2013.”
Total revenues in the fourth quarter of 2012 were $1.6bn compared with $2.1bn in the fourth quarter of 2011, and coal revenues were $1.4bn, down from $1.8bn in the year-ago period. The decreases in total revenues and coal revenues were primarily attributable to lower coal shipment volumes and lower average realizations for metallurgical and Eastern steam coal.
During the fourth quarter of 2012:
- met coal shipments were 4.9 million tons, compared with 5.3 million tons in the fourth quarter of 2011 and flat compared with the third quarter of 2012;
- Alpha shipped 11.6 million tons of PRB coal, compared with 13.9 million tons in the year-ago period and 13.2 million tons in the third quarter of 2012; and
- Eastern steam coal shipments were 9.4 million tons, compared with 11.9 million tons in the year-ago period and 9.8 million tons in the prior quarter.
Average per-ton realizations on met coal shipments in the fourth quarter were $121.27, down from $156.48 in the fourth quarter last year and $129.96 in the third quarter of 2012. Average per-ton realization for PRB shipments rose to $13, compared with $11.96 in the fourth quarter last year and $12.87 in the prior quarter. The per-ton average realization for Eastern steam coal shipments was $64.55, compared with $66.93 in the year-ago period and $66.40 in the third quarter of 2012.
The cost of coal sales in the East averaged $55.51 per ton, a level notably lower than in previous quarters due primarily to the impact of a $154m ($10.73 per ton) reduction in estimated asset retirement obligations arising largely from changes in engineering estimates of future water treatment costs, including the impacts of evolving treatment technologies and maturing treatment plans, and a benefits-related accrual reversal. This compares with Eastern cost of coal sales per ton of $81.21 in the fourth quarter of 2011 and $75.84 in the previous quarter.
The cost of coal sales per ton for Alpha Coal West‘s PRB mines was $9.21 during the fourth quarter of 2012, and the adjusted cost of coal sales per ton, which excludes the impact of a benefits-related accrual reversal, was $9.43, compared with cost of coal sales per ton of $9.44 in the fourth quarter of 2011 and $9.40 in the third quarter of 2012.
Including charges, Alpha lost $2.4bn in 2012
For the full year 2012, Alpha reported total revenues of $7bn, including $6bn in coal revenues, which included a full year contribution from the former operations of Massey Energy that were acquired on June 1, 2011. This compares with total revenues of $7.1bn and coal revenues of $6.2bn in 2011, which included the Massey operations for the last seven months of the year.
The slight decrease in coal revenue in 2012, despite the inclusion of a full 12 months of legacy Massey operations, is primarily attributable to ramping down the quarterly run-rate for met coal shipments in 2012 together with a 19% decrease in average per-ton realizations on metallurgical coal which resulted in a 14% decrease in met coal revenues. This decrease was partially offset by an 11% increase in Eastern steam coal revenues largely due to a 12% increase in shipment volumes in 2012 primarily resulting from a full year of the acquired Massey operations.
During 2012, Alpha’s coal shipments totaled 108.8 million tons, compared with 106.3 million tons for the full year 2011.
- Met coal shipments in 2012 were 20.3 million tons, compared with 19.2 million tons shipped during 2011.
- Shipments of PRB coal and Eastern steam coal in 2012 were 46.7 million tons and 41.8 million tons, respectively, compared with 49.9 million tons and 37.2 million tons, respectively, in the previous year.
For 2012, Alpha recorded a net loss of $2.4bn. Excluding various items, the adjusted net loss in 2012 was $207m.