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Alpha Natural Resources Should Improve Along With an Improving Coal Market

July 19, 2014 | About:
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kcpl

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Alpha Natural Resources (ANR) has been sailing through troubled waters for quite some time. It was mainly on account of the drop in coal prices and uncertain demand for metallurgical coal. Consequently its stock price also suffered a significant blow from its performance and tumbled around 35% since the beginning of this year. However based on its performance during the first quarter, it seems that the company is on the road to a turnaround and investors could breathe a sigh of relief for the time being.

Trying to improve performance

The management took various initiatives to bring the company back on track and reduce its losses. In this direction it adopted an aggressive cost cutting strategy and curtailed the costs by around 11% year on year, which helped the company to minimize its loss by around 50%. During the quarter it reported a loss of $55.7 million, from a year ago period of $110.8 million.

This was indeed a fabulous performance, considering its revenue was down around17% as compared to last year. And going forward its cost cutting moves will act as a tailwind for the company, which will fuel its business to grow further. The coal producer is also trying to build a new platform that would enable it to be more flexible and agile, allowing it to quickly respond to changing market conditions.

In addition to this, Alpha Natural Resources has negotiated with its financers and managed to extend the maturity of its debt obligations. It issued $690 million of senior convertible notes, of which $355 million will be due in 2017 and the remaining $345 million due in 2020. Alpha used a significant portion of these proceeds to repurchase existing convertible notes and reduced its outstanding convertible notes maturing in 2015 from $824 million to $194 million.

Positive developments

The company also termed out its bank debt, which lowered it’s near term repayment obligations significantly. Apart from this, it also sold a portion of its Marcellus gas area for a total of $300 million. This includes $100 million in cash and around 9.5 million shares of Rice Energy at the IPO price worth $200 million. Alpha also made an outstanding return on its investment of around $30 million in cash and contribution of approximately 7,500 acres made to the Alpha Shale Joint Venture.

Continuing with its debt restructuring strategy, it sold some of its non-core assets last year. Although the cash generated from these sales were modest but it helped the company to reduce its liabilities. It mainly includes retirement obligations, which will reduce future cash outflows from its idle properties.

These were some of the debt restructuring strategies that Alpha adopted to reduce its debt and minimize losses. But in spite of these moves the company will have to adopt various initiatives to fuel its top line. And going forward the management expects its prospects to improve as the demand pick up. According to a report, World Steel Association has forecasted a 3.3% increase in 2014 global steel demand, which is a slight improvement from last year’s growth rate. The company is also anticipating an increase in steel demand from the European Union. This demand is expected to grow in 2014 with a forecasted growth rate of 2.1% compared to an estimated decline of 3.8% last year.

Demand-supply equation

Although the demand is expected to improve but the same cannot be said on the supply side as only a few mines are scheduled to come online. According to estimates, total exports in 2014 are estimated to increase by only about 10 million metric tons, of which 6 million tons are from Australia. In addition to this the thermal coal market is also showing signs of improvement.

Because of the coal spills last year the demand has increase and so is the interest in the coal-fired electrical generation. This demand, in turn, is expected to accelerate the drawdown in utility stockpiles across the various regions. Electrical generators and grid operators are also focusing on the role of coal fire generation and are looking to maintain a reliable energy supply. According to the management, the domestic market has strengthened and the company expects to get its share of any additional domestic demand in the markets it serves. And going forward if the demand and supply match we can expect Alpha’s business to improve further.

Conclusion

Currently Alpha is struggling to improve its numbers and strengthen its balance sheet. Its cash position is just $970 million compared to a huge debt of $3.43 billion. But as already mentioned the management has negotiated with its financers and extended the debt maturities. In addition to this to further minimize its debt it has sold it non-core assets and has taken various other initiatives to reduce cost.

These initiatives will help the company to improve its bottom line. Moreover the stock has dipped considerably, which is a good sign for investors as it provides the stock significant room to grow. Hence looking at all the above factors investors can consider adding Alpha Natural Resources to their portfolio.


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