Virginia-based coal producer Alpha Natural Resources (NYSE: ANR) on Aug. 6 reported a second quarter 2014 net loss of $513m, which includes a $309m non-cash goodwill impairment charge, compared with a net loss of $186m in the second quarter of 2013.
“Coal markets remained extremely challenging in the second quarter, with the metallurgical coal benchmark at $120 per metric ton, API2 pricing below the break-even point for most U.S. producers, and domestic thermal pricing stagnating amid softer natural gas prices, increased imports (primarily from Colombia) and increased volumes of lower quality metallurgical coal crossing over into the thermal markets,” said Kevin Crutchfield, chairman and CEO of Alpha.
During this period of difficult market conditions and a very challenging domestic regulatory environment, Alpha said it continues to focus its efforts on what it can control, as demonstrated by continued cost reduction efforts in the East and other proactive corporate actions.
Previously announced cost initiatives are yielding good results, including multi-year lows in Eastern adjusted cost of coal sales at $62.01/ton. Although Powder River Basin (PRB) costs came in above expectations, this was primarily due to rail underperformance, which continues to significantly hinder shipment volumes across all regions, especially in the PRB. Alpha has two mines in the Wyoming PRB; Belle Ayr and Eagle Butte. As a result, second quarter PRB shipment volumes were 1.5 million tons below first quarter levels.
While in the first quarter the company exhibited some optimism with respect to a potential bottom in met coal prices and anticipated the potential for improvements in the second half of 2014 and into 2015, prices remain sluggish and Alpha said it does not anticipate any imminent catalyst to support more favorable pricing conditions in the near term.
In addition to met coal weakness, thermal pricing improvement has not materialized as conventional wisdom had suggested. Alpha will continue to evaluate its company-wide cost structure as well as assess the condition of the end markets around the globe.
Alpha said it has made the difficult decision to take further proactive steps to optimize production in the face of weak demand for thermal and met coals and continued regulatory challenges. On July 31, the company announced that its affiliates sent Worker Adjustment and Retraining Notification (WARN) notices to approximately 1,100 employees in Central Appalachia (CAPP).
Alpha likely to idle Emerald longwall in the second half of 2015
Furthermore, as a result of the combination of weak market conditions and uncertain geology, the decision has been made to operate the Emerald longwall mine, working the Pittsburgh coal seam in southwest Pennsylvania, only through the second panel in district D, meaning that it will likely cease production in the second half of 2015. While this decision is expected to reduce Pittsburgh-seam longwall production volumes after 2015, Alpha is pursuing initiatives at the nearby Cumberland longwall mine to increase volumes and broaden market exposure which should make up some of the margin loss from the higher-cost Emerald longwall mine.
Total revenues in the second quarter of 2014 were $1.1bn compared with $1.3bn in the second quarter of 2013, and coal revenues were $0.9bn, down from $1.1bn in the year-ago period. The decreases in total revenues and coal revenues were primarily attributable to lower average realizations and lower shipments of metallurgical and PRB steam coal.
- During the second quarter of 2014, met coal shipments were 4.5 million tons, compared with 5.6 million tons in the second quarter of 2013 and 4.4 million tons in the prior quarter of 2014. The average per ton realization on met coal shipments in the second quarter was $86.31, down from $100.95 in the second quarter last year and $89.99 in the prior quarter.
- Alpha shipped 7.9 million tons of PRB coal during the quarter, compared with 8.8 million tons in the year-ago period and 9.4 million tons in the prior quarter. The average per-ton realization for PRB shipments was $11.81, compared with $12.37 in the second quarter last year and $12.26 in the prior quarter.
- Eastern steam coal shipments were 7.5 million tons, compared with 7.2 million tons in the year-ago period and 7.6 million tons in the prior quarter. The per-ton average realization for Eastern steam coal shipments was $58.53, compared with $62.54 in the year-ago period and $58.25 in the prior quarter.
The cost of coal sales in the East averaged $60.65 per ton, compared with $76.41 in the second quarter last year and $65.76 in the prior quarter. Excluding a $1.36 per ton benefit of merger-related items, the adjusted cost of coal sales in the East averaged $62.01/ton, compared with $74.42 in the second quarter last year, which excluded $0.17 per ton of merger-related expense and a $1.82 per ton impact from provision for regulatory costs, and $65.73 in the first quarter of 2014 which excluded $0.03 per ton of merger-related expense. The quarter-over-quarter reduction in Eastern adjusted cost of coal sales per ton was primarily driven by Alpha’s cost reduction initiatives.
The cost of coal sales per ton for Alpha Coal West‘s PRB mines was $12.06 during the second quarter of 2014, compared with $10.08 in the second quarter of 2013 and $10.23 in the prior quarter. The primary reason for the PRB cost increase was reduced shipment volumes, which were mainly attributable to poor rail service at both mines.
First half coal shipments down from the same period in 2013
During the first six months of 2014, Alpha’s coal shipments totaled 41.3 million tons, compared with 44.5 million tons in the year-ago period.
- Met coal shipments were 8.9 million tons for the first six months of 2014, compared with 10.7 million tons shipped during the same period a year ago.
- Shipments of PRB coal and Eastern steam coal were 17.4 million tons and 15.1 million tons, respectively, during the first six months of 2014, compared with 18.7 million tons and 15.1 million tons, respectively, during the first six months of 2013. The year-over-year decrease in shipments of PRB coal reflects poor rail performance, while the year-over year decrease in met coal shipments is primarily driven by weak market conditions.
Metallurgical Coal – The global seaborne met coal market has shown very little improvement over the last several months and continues to exhibit dynamics of an oversupplied market, Alpha said. While the third quarter hard coking coal benchmark remained at $120/tonne, indicating that pricing may have reached a bottom, Alpha does not see an imminent catalyst to spur a favorable pricing uptick in the near term.
Increases in met coal production, primarily from Australia, continue to cause an oversupplied seaborne met coal market, with Australian year-to-date exports up 13%, or 10 million tonnes, to 90 million tonnes through June. After a reduction of more than 20% in the first quarter over the same period last year, Chinese import declines moderated during the last quarter, down 7% in April, 9% in May and up 22% in June, resulting in flat second quarter 2014 imports compared to second quarter of 2013.
So far, announcements to cut global met coal production are in the 20 million tonne range, and additional production cuts are likely. Alpha believes many of these announced reductions have not yet taken full effect as certain mines have yet to idle or are selling their remaining inventory. “We expect this situation to persist for the majority of 2014, with market conditions gradually improving as we head into 2015,” the company added.
“In our view, the European metallurgical coal market, although weak, remains stronger relative to the Pacific Basin and we believe that we are well positioned in the long term in our natural markets in the Atlantic Basin,” Alpha said.
Thermal Coal – While last quarter Alpha saw potential indications of a firming market for thermal coal, recent price trends have not supported this expectation. Although domestic utility inventory levels remain well below normal, softer natural gas prices, increased imports of thermal coal, primarily from Colombia, declining usage of thermal coal by power plants in response to EPA regulations and met coal crossing over to thermal markets have contributed to an “unexciting” pricing environment. In addition, sluggish electricity demand, which has stayed below 2008 levels, continues to confine coal demand.
Rail underperformance continues to hinder coal volumes across all regions, particularly in the PRB. Utility inventory levels at the end of June 2014 were at about 56 days of coal burn compared to a five-year average of around 72 days, and 75 days of burn as of a year ago.
Competition from the Illinois Basin intensified further during the second quarter, contributing to lower pricing in Northern Appalachia (NAPP). Continued soft conditions in NAPP, where Cumberland and Emerald are located, were exacerbated by the threat of increased production from competing mines, and natural gas prices retreating to the high $3 range. Utility inventories in NAPP stood at roughly 57 days of coal burn at the end of June 2014, compared to about 46 days in March 2014 and 72 at the end of June 2013.
Similarly, utility stockpiles in Central Appalachia (CAPP) at the end of June 2014 are well below normal five-year average burn levels, at the approximately 67 day burn level, down from roughly 124 days a year ago. “Despite this, we see no demonstrated sense of urgency from the utilities, due in part to mild weather so far this summer and natural gas injections running above expectations for the past several weeks,” Alpha said. “These factors, coupled with poor rail performance in the East, have significantly muted the CAPP thermal expectations we exhibited last quarter.”
The seaborne market is equally “uninspiring,” with API2 spot pricing remaining weak at roughly $76 per tonne, delivered into Northern Europe, and anticipated 2015 calendar year pricing declining over the past few months to under $80 per tonne, both below the breakeven point for the majority of US producers. Unless the API2 benchmark improves meaningfully, Alpha expects U.S. thermal export tons to decline materially in 2015 and continue to put pressure on domestic pricing.
Alpha is maintaining its 2014 shipments guidance for Eastern met and Eastern steam coals while lowering its PRB guidance to a range of 34 million to 37 million tons primarily due to poor rail performance in the West. It now expects to ship between 75 million and 85 million tons, including 15 million to 18 million tons of Eastern met coal, 26 million to 30 million tons of Eastern steam coal, and 34 million to 37 million tons of Western steam coal out of the PRB.
As of July 17, 2014, 96% of the midpoint of anticipated 2014 metallurgical coal shipments was committed and priced at an average expected per ton realization of $87.66. Based on the midpoint of guidance, 97% of anticipated 2014 Eastern steam coal shipments were committed and priced at an average expected per ton realization of $58.53; and 100% of the midpoint of anticipated 2014 PRB shipments was committed and priced at an average expected per ton realization of $12.12.
Alpha’s 2014 guidance for its Eastern adjusted cost of coal sales per ton is now $63.00 to $67.00, while Western cost of coal sales per ton is now at $10.50 to $11.50 per ton.
Alpha is one of the largest and most regionally diversified coal suppliers in the United States. With mining operations in Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming, Alpha supplies metallurgical coal to the steel industry and thermal coal to generate power to customers on five continents.