Alpha Natural Resources (NYSE: ANR), hit by a continuing poor market for coal, reported on Aug. 2 a second quarter 2013 net loss of $186m, compared with a net loss of $2.2bn in the second quarter of 2012.
That year-ago quarterly loss included approximately $2.5bn of pre-tax impairment and restructuring charges. Excluding the items described in a “Reconciliation of Adjusted Net Loss to Net Loss,” the second quarter 2013 adjusted net loss was $129m, compared with an adjusted net loss of $72m in the second quarter of 2012.
“Alpha continues to proactively address changing market conditions by optimizing our mine portfolio and idling additional uneconomic metallurgical and thermal coal capacity, and we anticipate additional actions may be required between now and the end of the year. At the same time, we remain focused on adjusting our overhead and capital expenditures in proportion with our changing operational footprint,” said Kevin Crutchfield, Alpha chairman and CEO.
Operationally, Alpha shipped 5.6 million tons of metallurgical coal during the second quarter of 2013, up 10% from the first quarter of the year. Despite strong met shipments, the quarter was not without its challenges, Alpha noted. The global market for seaborne met coal remains oversupplied, further pressuring margins. The market for export steam coal in the Atlantic basin is currently uneconomic for most, if not all, U.S. production.
Domestic utility coal inventories are decreasing, which should lead to a more balanced supply/demand picture in the future, but the domestic markets for Central Appalachian (CAPP) and Powder River Basin (PRB) thermal coals continue to be characterized by oversupply in the case of the former and the threat of oversupply stemming from “latent” capacity in the case of the latter, Alpha said.
Problems at Cumberland and Emerald pushed up costs
In addition to these “macro headwinds,” Alpha experienced unexpected downtime at the Cumberland mine and less favorable mining conditions at the Emerald mine, both of which limited production and shipments of Alpha’s relatively higher margin Pittsburgh #8 coal. These are both longwall-equipped mines located near each other in southwestern Pennsylvania. Increased unit costs at the Pittsburgh #8 longwalls primarily drove the sequential increase in adjusted cost of coal sales per ton from Eastern operations in the second quarter.
Crutchfield reported: “Alpha has accomplished several key objectives with respect to its capital structure: 1) managing debt maturities by refinancing some maturities with longer-dated instruments; 2) reducing our 2015 maturities, which now stand at approximately $400 million; 3) relaxing covenant requirements in order to weather a challenging market environment; 4) limiting potential equity dilution from the new 2017 converts with a 50% conversion premium; and 5) maintaining our cash and liquidity position.”
During the second quarter of 2013, met coal shipments were 5.6 million tons, essentially flat compared with the second quarter of 2012 and up from 5.1 million tons compared with the prior quarter (first quarter of 2013). Alpha shipped 8.8 million tons of PRB coal during the second quarter, compared with 10.2 million tons in the year-ago period and 10.0 million tons in the first quarter of 2013. Eastern steam coal shipments were 7.2 million tons, compared with 11.0 million tons in the year-ago period and 7.9 million tons in the prior quarter.
The average per ton realization on met coal shipments in the second quarter was $100.95, down from $127.83 in the second quarter last year and $103.28 in the prior quarter. The average per-ton realization for PRB shipments was $12.37, compared with $12.96 in the second quarter last year and $13.03 in the prior quarter. The per-ton average realization for Eastern steam coal shipments was $62.54, compared with $65.05 in the year-ago period and $61.90 in the prior quarter.
The cost of coal sales in the East averaged $76.41 per ton, compared with $76.78 in the second quarter last year and $69.52 in the prior quarter. Excluding $0.17 per ton of merger-related expenses and $1.82 per ton impact from a provision for regulatory costs, the adjusted cost of coal sales in the East averaged $74.42 per ton, compared with $74.21 in the second quarter last year, which excluded $2.57 of merger-related expense, and $69.33 in the first quarter of 2013 which excluded $0.19 of merger-related expense.
The sequential increase in adjusted Eastern cost of coal sales per ton during the second quarter of 2013 primarily reflects the impact of reduced shipments and higher unit cost performance at the Pennsylvania longwall mines. The cost of coal sales per ton for Alpha Coal West’s PRB mines in Wyoming (Belle Ayr and Eagle Butte) was $10.08 during the second quarter of 2013, compared with cost of coal sales per ton of $11.01 in the second quarter of 2012, partially due to mining a higher proportion of coal owned in fee for which there is no production royalty expense.
Revenues down sharply in the first half of this year
For the first six months of 2013, Alpha reported total revenues of $2.7bn, including $2.3bn in coal revenues, compared with total revenues of $3.8bn and coal revenues of $3.2bn during the first six months of 2012. The year-over-year decreases in both total revenues and coal revenues were primarily attributable to lower average realizations for met and steam coal, as well as lower steam coal shipment volumes.
During the first six months of 2013, Alpha’s coal shipments totaled 44.5 million tons, compared with 54.9 million tons in the year-ago period. Metallurgical coal shipments were 10.7 million tons year-to-date, compared with 10.5 million tons shipped during the first six months of 2012. Shipments of PRB coal and Eastern steam coal were 18.7 million tons and 15.1 million tons, respectively, during the first six months of 2013, compared with 21.9 million tons and 22.5 million tons, respectively, during the first six months of 2012. The year-over-year decreases in shipments of PRB and Eastern steam coal primarily reflect efforts to match production with demand.
As for the market outlook, Alpha reported: “During the second quarter of 2013, the global seaborne market for metallurgical coal deteriorated further due to increasing supply out of Australia together with the expectation of slowing Chinese steel production growth and the ongoing economic malaise in Europe and Brazil. The third quarter Asian benchmark price was announced at $145 per metric tonne, down $27 from $172 per metric tonne in the preceding quarter, and recent spot transactions have been reported at levels approximately $15 below the current benchmark. Lower capacity utilization rates have allowed many steelmakers to lengthen cycle times in their coke ovens, enabling them to increase their reliance on lower quality metallurgical coals in order to manage their input costs. While the market remains weak, lower rank metallurgical coal prices have changed little in the last several months and higher quality metallurgical coal prices have fallen, resulting in spread compression between different qualities.
“In the current market environment, a significant proportion of global production is uneconomic, and, consequently, production cutbacks have been widespread, with several cutbacks recently announced in Australia and the United States,” Alpha added. “Thus, the market may begin to move back toward supply/demand balance. In the intermediate to long run, the world is expected to require increasing volumes of met coal, and assuming market conditions improve—driven by the current dearth of new development projects in the face of today’s challenging market conditions—we believe Alpha will be well-positioned to benefit from its leadership position in met coal reserves, met coal production and export terminal capacity.
“Nationwide utility inventories of thermal coal continue to trend lower and reached an estimated 169 million tons at the end of June. However, market conditions for domestic thermal coal continue to vary by region. Inventories of Northern Appalachian (NAPP) thermal coal are slightly below normal at approximately 65 days of burn, and opportunities exist for producers to contract additional volumes with utility customers.”
When the Cumberland mine is back in full production, Alpha said it should be positioned to benefit more fully from its strong position in NAPP.
Utility inventories of PRB coal have continued to decrease to 67 days of burn at the end of the quarter, a level slightly below normal. This inventory trend may suggest improving market conditions in the future; however, with prices recently reported at three-month lows, the PRB appears to be continuing to suffer under the “specter” of excess capacity in the near-term, Alpha said.
CAPP hit the worst by high steam coal inventories, down markets
Inventories of CAPP thermal coals have also been decreasing but remain elevated at 134 days of burn at the end of June 2013, Alpha pointed out.
“We continue to believe that a significant portion of the decreased consumption of CAPP thermal coal is structural, driven by fuel switching in favor of gas, coal-fired plant retirements that are disproportionately impacting the regions served by CAPP coal, and encroachment of other lower cost coals, such as from the Illinois Basin,” Alpha said. “In the near-term, demand has been further dampened by current API2 spot prices that render most U.S. thermal coal production, and essentially all CAPP thermal coal production, uneconomic on the export seaborne market. In light of decreased demand for CAPP thermal coals, Alpha has significantly reduced its production thermal coal in CAPP, and the company continues to review its production footprint in CAPP as part of its ongoing optimization process in order to match production with anticipated demand.”
On July 15, Alpha announced that production had been suspended at Cumberland due to adverse geological conditions in the mine’s headgate area. Production remains suspended and work continues to remediate the roof conditions at the Cumberland headgate. The impact on Alpha’s Eastern steam coal shipment volumes and Alpha’s Eastern adjusted cost of coal sales per ton in the third quarter will in large part depend on completion of the ongoing remediation work.
With regard to Alpha’s expected Eastern adjusted cost of coal sales per ton for 2013, it expects these unit costs to be similar to prior estimates for eastern operations other than the Pennsylvania longwall mines. At those two high volume operations, adjusted cost of coal sales per ton are now expected to be higher than previous estimates as a result of mining conditions and ventilation issues experienced in the second quarter and the adverse geologic conditions presently being experienced at the Cumberland mine.
Shipments this year could hit 91 million tons at the top end
Currently, Alpha expects to ship between 83 million and 91 million tons during 2013, including 19 million to 21 million tons of Eastern met coal, 27 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 July 17, 88% of the midpoint of anticipated 2013 met coal shipments were committed and priced at an average per ton realization of $102.20. Based on the midpoint of guidance, 98% of anticipated Eastern steam coal shipments were committed and priced at an average per ton realization of $62.66; and 100% of the midpoint of anticipated PRB shipments were committed and priced at an average per ton realization of $12.64.
The company’s 2013 adjusted cost of coal sales is expected to range between $72.00 and $76.00 per ton in the East and between $10.00 and $10.50 per ton in the West.