In the wake of a depressed coal market and collapsing earnings of coal companies, Fitch Ratings said Jan. 15 that it conducted an analysis on one of the largest pure-play North American metallurgical coal producers, Walter Energy.
The report summarizes the Fitch view of the credit profile and highlights critical issues surrounding the company’s operations and focuses on the company’s response to a weak global metallurgical coal market.
After a “massive drop” in hard coking coal benchmark prices from $235 per tonne in the third quarter of 2012 to $172/tonne in the second quarter of 2013, prices have continued to fall, at $143/tonne as of the first quarter of 2014, Fitch noted.
Despite a slight increase in the fourth quarter of 2013, Fitch said that it does not expect a meaningful near-term rebound as demand is still feeble and Australian coal supply is expanding, meaning more competition for Walter Energy on the seaborne market.
“We believe Walter may struggle with upcoming covenant compliance and 2015 debt repayment without a material rebound in coal prices,” Fitch added. “Fitch estimates a benchmark in at least the mid-$160s/t is needed for the company to be free cash flow positive. Even then, it will have to contend with the 8.0x senior secured leverage covenant in June 30, 2014.”
That said, Fitch still believes potential value exists. The company’s value is supported by its solid asset base of high-quality coal reserves. As of the end of 2012, Walter had 358 million tonnes of proven coal reserves, including 192 million tones in Alabama where it has premier longwall mining operations, 40 million tonnes in West Virginia and 124 million tonnes in western Canada. The company has also been aggressive in its cost-cutting, Fitch added.