Alpha Natural Resources (NYSE: ANR), a leading U.S. coal producer, reported on Oct. 30 a third quarter 2014 net loss of $185m, compared with a net loss of $458m in the third quarter of 2013.
Said Kevin Crutchfield, chairman and CEO: “While coal markets remained extremely challenging in the third quarter, we continue to be proactive by thoughtfully rationalizing our production base, reducing costs and maximizing efficiency. Our continuing cost reduction efforts in the East and other corporate actions are yielding strong results, including multi-year lows in Eastern adjusted cost of coal sales at $61.69 per ton in the third quarter, allowing us to reduce our Eastern cost of coal sales guidance for 2014 by $2.00 to a midpoint of $63.00 per ton. Although costs in the PRB were lower in the third quarter compared to the second quarter, they once again came in above our expectations, primarily due to rail underperformance, which continues to hinder shipment volumes.”
The company remains focused on prudently managing its liquidity and balance sheet during this difficult market period. Alpha recently announced an amendment and extension of its senior secured credit facility and established a new $200m accounts receivable securitization facility, further solidifying its liquidity position while improving future financial flexibility. As a result of these efforts, Alpha maintained its liquidity position of approximately $2.3bn.
In October, the company’s subsidiary in central Pennsylvania, AMFIRE Mining Co. LLC, entered into an asset purchase agreement with Rosebud Mining, a well-respected regional operator founded by coal operator J. Clifford Forrest with synergies in both geography and transportation. The deal will allow Alpha to divest substantially all of AMFIRE’s assets for total consideration of about $86m, including $75m in cash and assumption of certain liabilities. The transaction is expected to close by year end.
Total 2014 AMFIRE production through September was approximately 1.7 million tons, including 1.2 million tons of metallurgical coal. AMFIRE was one of the operations, formerly held by the principals behind American Metals & Coal International, that Alpha was founded on early last decade. Alpha for years has been the only large coal producer in central Pennsylvania, which is a major source of low-vol met coal for the steel industry.
Coal prices remain ‘challenging’
“While we are pleased with our operational and cost performance in the third quarter, coal pricing remains highly challenging across all regions in both domestic and export markets. For the third consecutive quarter, the Asian hard coking coal benchmark remained at near $120 per metric ton. Thermal markets continue to experience soft prices, with API2 in the low $70s per tonne – well below the break-even point for most U.S. producers – and domestic Central Appalachia thermal declining to the low $50s. Given the continued price weakness in these two thermal markets, we are continuing to assess our Central Appalachian thermal production for 2015, as indicated in our updated WARN notification press release in late September. Northern Appalachia has been the strongest thermal market in the third quarter on a relative basis, with prices in the mid-$50s, despite strong competition from the Illinois Basin and softening natural gas prices,” said Alpha President Paul Vining.
As previously disclosed, the Emerald longwall mine in the Pittsburgh seam in southwest Pennsylvania will operate only through the second panel in district D. Emerald will be conducting development work with minimal production during the first quarter of 2015, likely resulting in higher overall Eastern cost of coal sales per ton during that period. Alpha now expects Emerald to cease production near the end of 2015.
Total revenues in the third quarter of 2014 were $1.1bn compared with $1.2bn in the third quarter of 2013, and coal revenues were $0.9bn, down from $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 Powder River Basin (PRB) steam coal.
During the third quarter of 2014, metallurgical coal shipments were 4.8 million tons, compared with 5.0 million tons in the third quarter of 2013 and 4.5 million tons in the prior quarter of 2014. Alpha shipped 9.3 million tons of PRB coal during the quarter, compared with 10.1 million tons in the year-ago period and 7.9 million tons in the prior quarter. Eastern steam coal shipments were 7.2 million tons, compared with 6.7 million tons in the year-ago period and 7.5 million tons in the prior quarter.
The average per ton realization on metallurgical coal shipments in the third quarter was $82.45, down from $94.73 in the third quarter last year and $86.31 in the prior quarter. The average per-ton realization for PRB shipments was $11.81, compared with $12.58 in the third quarter last year and $11.81 in the prior quarter. The per-ton average realization for Eastern steam coal shipments was $58.16, compared with $63.21 in the year-ago period and $58.53 in the prior quarter.
For the first nine months of 2014, Alpha reported total revenues of $3.2bn, including $2.8bn in coal revenues, compared with total revenues of $3.9bn and coal revenues of $3.3bn during the first nine months of 2013. The year-over-year decreases in both total and coal revenues are primarily attributable to lower average realizations and lower shipments of metallurgical and PRB steam coal.
During the first nine months of 2014, Alpha’s coal shipments totaled 62.5 million tons, compared with 66.3 million tons in the year-ago period. Met coal shipments were 13.7 million tons for the first nine months of 2014, compared with 15.7 million tons shipped during the same period a year ago. Shipments of PRB and Eastern steam coal were 26.6 million tons and 22.3 million tons, respectively, during the first nine months of 2014, compared with 28.8 million tons and 21.8 million tons, respectively, during the first nine months of 2013. The year-over-year decrease in shipments of PRB coal reflects principally poor rail performance, while the year-over year decrease in metallurgical coal shipments is primarily driven by weak market conditions and mine idlings.
For the first nine months of 2014, the company-wide average realization was $44.65 per ton and the adjusted average cost of coal sales was $41.00 per ton, resulting in a $3.65 per ton, or 8.2%, adjusted coal margin. By comparison, company-wide average realization in the first nine months of 2013 was $49.65 per ton and the adjusted average cost of coal sales was $45.37 per ton, resulting in a $4.28 per ton, or 8.6%, adjusted coal margin. The decrease in adjusted coal margin per ton was primarily attributable to lower per ton realizations across all of Alpha’s shipments, including Eastern metallurgical coal, Eastern steam coal and PRB coal, partly offset by lower Eastern adjusted costs of coal sales per ton.
Said Alpha: “The global seaborne metallurgical coal market has shown no meaningful improvement over the last several months and continues to exhibit dynamics of an oversupplied market. The Asian hard coking coal benchmark remained at approximately $120 per metric tonne for the third consecutive quarter, with spot assessments measured in the range of $110–$115 per metric tonne over the past several months.
“Decelerating growth in steel demand in China, coupled with increases in Australian metallurgical coal production continue to cause an oversupplied seaborne metallurgical coal market. The World Steel Association (WSA) recently lowered its global apparent steel usage (ASU) growth forecast for 2015 to 2.0 percent from 3.3 percent, with Chinese ASU growth forecast dropping from 2.7 percent to 0.8 percent. Furthermore, Chinese metallurgical coal imports continued to decline significantly in 2014 to an annualized rate of approximately 60 million tonnes, compared to approximately 75 million tonnes in 2013. Australian year-to-date exports are up 12 percent, or 13 million tonnes, to 120 million tonnes through August.
“Announced cuts to global metallurgical coal production through production curtailments and mine idlings are in the 25 million tonne range with additional production cuts likely as current prices do not allow a return for many of the global producers. North American production cuts account for approximately 15 million tonnes, or nearly 60 percent of announced global cuts to date. As stated on our second quarter earnings conference call, we believe many of these announced reductions have not yet taken full effect as certain mines have yet to idle or are selling their remaining inventory.”
“Recent price trends suggest that the thermal coal market will remain weak into early 2015. Although domestic utility inventories remain at historically low levels, softer natural gas prices, increased imports of thermal coal and declining usage of thermal coal by power plants in response to EPA regulations have contributed to a continued weak pricing and demand environment.
“Rail underperformance continues to hinder shipping volumes across all regions, particularly in the PRB. Utility inventory levels at the end of September 2014 were at approximately 45 days of coal burn compared to a five-year average of approximately 65 days and 45 days of burn as of the end of August 2014.
“While pricing in Northern Appalachia (NAPP) has held up better than in other regions, it is still down over the past few months. Increased competition from the Illinois Basin, the threat of increased production from competing mines, and natural gas prices retreating to the high $3 per MMBtu range with large basis differentials have all contributed to continued soft market conditions in NAPP. Utility inventories in NAPP stood at roughly 62 days of coal burn at the end of September 2014, compared to approximately 56 days in August 2014 and five-year average of 61 days.
“Utility stockpiles in Central Appalachia (CAPP) at the end of September 2014 are well below normal five-year average burn levels, at approximately 77 days, up from 73 days at the end of August 2014, but down significantly from roughly 120 days a year ago. Despite this, we continue to see no demonstrated sense of urgency from the utilities, due in part to mild summer weather, lackluster demand and strong natural gas injections over the past several months.
“The seaborne market is equally uninspiring. API2 spot pricing weakened further from roughly $76 per tonne in the prior quarter to approximately $73 per tonne currently and in line with 2015 calendar year pricing – well below the break-even point for the majority of U.S. producers.”
2014 and 2015 Outlook
“We are increasing our 2014 shipment guidance for Eastern metallurgical and Eastern steam coals while maintaining our PRB guidance. We now expect to ship between 79 and 86 million tons, including 17 to 19 million tons of Eastern metallurgical coal, 28 to 30 million tons of Eastern steam coal, and 34 to 37 million tons of Western steam coal. The increase in expected shipment volumes of Eastern metallurgical coal is principally due to a shift of crossover coals into the metallurgical markets, increased use of purchased coal in our sales mix and extension of the WARN notices at several mines.
“We have committed a total of approximately 56 million tons for 2015, consisting of more than eight million tons of metallurgical coal, more than 16 million tons of Central and Northern Appalachian coal and nearly 31 million tons of PRB coal. As of October 21, 2014, 100 percent of the midpoint of anticipated 2014 metallurgical coal shipments was committed and priced at an average expected per ton realization of $85.71. Based on the midpoint of guidance, 99 percent of anticipated 2014 Eastern steam coal shipments were committed and priced at an average expected per ton realization of $58.03, and 100 percent of the midpoint of anticipated 2014 PRB shipments was committed and priced at an average expected per ton realization of $11.99. Alpha’s 2014 guidance for its Eastern adjusted cost of coal sales per ton is now $62.00 to $64.00, while Western cost of coal sales per ton is now at $11.00 to $11.50.
“Guidance for 2014 capital expenditures remains at $225 million to $275 million. Based on preliminary estimates, we expect 2015 capital expenditures to range from $275 million to $350 million. The increase in 2015 capital expenditures relative to 2014 is primarily due to anticipated regulatory and environmental investments as well as incremental equipment rebuild expenditures.”
Virginia-based Alpha Natural Resources is one of the largest and most regionally diversified coal suppliers in the United States. With affiliate mining operations in Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming, Alpha supplies met coal to the steel industry and thermal coal to generate power to customers on five continents.