Walter Energy reduces its loss in Q1 2013 as met coal sales boom

Walter Energy (NYSE: WLT) (TSX: WLT), which recently beat back an effort by an outside investor to get five dissident members added to its Board of Directors, reported on May 1 a net loss of $49.4m, compared to a net loss of $71m in the fourth quarter of 2012 and net income of $40.6m in the first quarter of 2012.

Revenues were $491m in the first quarter of 2013, an increase of 3% from the fourth quarter of 2012. Revenues declined from $632m in the first quarter of 2012, due to industry-wide lower metallurgical coal prices.

The first quarter of 2013 loss includes charges of $4.9m, net of tax, related to curtailing production at the Willow Creek surface mine in western Canada and $4.4m, net of tax, due to proxy contest expenses related to that dissident shareholder, Audley Capital Advisors LLP. Excluding these charges and adjustments described in the Company’s “Reconciliation of Non-GAAP Financial Measures,” the first quarter 2013 adjusted net loss was $40.1m and Adjusted EBITDA was $32m.

Audley, critical of the coal producer’s past financial management and future plans, tried to knock five members off of Walter Energy’s board, but shareholders wound up electing all of the company’s ten board candidates.

“In the first quarter, we made continued progress on our key strategic initiatives, most notably on our aggressive cost reduction efforts,” said Walter Energy CEO Walt Scheller. “While we have seen stronger demand in 2013, met coal pricing has improved only marginally, and the recovery in the global economy and metallurgical coal markets remains uncertain. We remain focused on operating safely, further reducing costs, carefully managing capital spending, improving liquidity and reducing our debt levels as we position the Company to benefit when markets recover.”

Met coal sales volume rose in the first quarter

First quarter of 2013 met coal sales volume, including both hard coking coal (HCC) and low-vol PCI, was 2.8 million metric tons (MMTs), an increase of 17% and 9%, respectively, compared to first quarter of 2012 and the fourth quarter of 2012. HCC sales volume was 2.4 MMTs in the first quarter of 2013 compared to 1.9 MMTs and 2.0 MMTs in the first quarter of 2012 and fourth quarter of 2012, respectively. Low-vol PCI sales volume was 0.4 MMTs compared to 0.5 MMTs in both the prior year comparable period and the fourth quarter of 2012. In the first quarter of 2013, met coal sales tonnage was approximately 88% of total coal sales volume.

Overall in the first quarter, pricing strengthened, Walter Energy reported. Average realized met coal pricing improved 2% as compared to the fourth quarter 2012. The average first quarter 2013 selling price of HCC (primarily low-vol and mid-vol) was $154 per metric ton (MT), which was slightly higher than the fourth quarter average of $152 per MT and significantly less than first quarter 2012 average price of $225 per MT. The average selling price for low-vol PCI was $139 per MT as compared to $128 per MT in the prior quarter and $188 per MT in the prior year comparable quarter.

Met coal production was 2.8 MMTs in the first quarter of 2013, made up of 2.3 MMTs of HCC and 0.5 MMTs of low-vol PCI. Met coal production increased 12% from the 2.5 MMTs produced in the fourth quarter of 2012.

First quarter 2013 met coal production in the company’s U.S. Operations segment in Alabama and southern West Virginia increased to 1.7 MMTs compared to 1.5 MMTs in the fourth quarter 2012, despite the impact of two longwall moves in Alabama during the quarter. The Canadian and U.K. Operations segment increased met coal production to 1.0 MMTs compared to 0.9 MMTs in the fourth quarter 2012.

Consolidated cash cost of sales for HCC was $120 per MT in the first quarter compared to $124 per MT in the fourth quarter of 2012. In the U.S. Operations segment, the cash cost of sales for HCC decreased to $110 per MT in the first quarter, from $118 per MT in the fourth quarter of 2012.

Cash cost of sales for low-vol PCI at the company’s Brule mine in western Canada was $122 per MT in the first quarter of 2013, compared with $165 and $159 in the fourth quarter 2012 and first quarter 2012, respectively. The major improvement in costs primarily reflects cost reduction initiatives including the conversion of the mine from contractor-operated to owner-operated.

The Willow Creek mine reduced its costs in the first quarter as a result of improved productivity, lower spending and lower LCM charges. Cost of sales per ton declined by 51% compared to the fourth quarter of 2012 and 65% compared to the first quarter of 2012. However, the mine’s cost structure remains high, and due to the current weak met coal pricing environment the company has previously announced that it would curtail production at Willow Creek. The company expects that the ongoing costs at the mine will not be significant.

Thermal coal sales and production drop lately

Sales of thermal coal totaled about 0.4 MMT in the first quarter 2013, a decline of about 42% from fourth quarter 2012. Thermal coal production was also lower in the first quarter, down 20%, from the fourth quarter, primarily due to difficult mining conditions at the company’s North River longwall mine in Alabama, which is in its last months of production due to reserve depletion. The mine has been a traditional supplier to Alabama Power. These conditions and the related reduced production resulted in an increase to cash cost of sales of approximately $37 per MT during first quarter 2013 compared to the fourth quarter of 2012. The company expects to close North River earlier than previously planned and anticipates this closure to occur before year-end. The company expects that the performance of the mine will return to more normal levels for the remainder of its life.

While the company does not provide earnings guidance, it does provide directional commentary and observations on key areas of the business.

  • Sales price per ton for met coal is expected to be slightly higher in the second quarter compared with the first quarter, with met coal sales volumes expected to be in line with the first quarter.
  • The company expects to lower its per ton met coal cost of production and cost of sales in the second quarter of 2013 by more than 5%.
  • Overall earnings, adjusted EBITDA and cash flows are expected to significantly improve in the second quarter compared to the first quarter.
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.