The increasing utility regulation coupled with low natural gas prices and gradually declining Chinese coal imports have made things tough for coal price recovery and demand across the world for many coal miners. Amidst this tough scenario Alpha Natural Resources (ANR, Financial) is doing the right things to build strong liquidity position through various measures such as sales of its non-core assets, costs-cutting initiatives and productivity improvement processes. These actions will help the company to remain stable in the short run until the demand and price recovers.
The way forward
Looking ahead, Alpha is making various adjustments to combat this unfavourable environment. It is sticking to the fundaments, which is quite appreciable. It is changing the base for its products, executing additional cost reduction initiatives and enhancing its operational efficiency. It is bringing its overhead costs structure in line with production volumes and optimizing its asset portfolio.
Also, it plans to close high cost production assets. These initiatives will generate savings of $60 million to $70 million in fiscal 2015. This includes nearly $20 million to $25 million from SG&A and about $40 million to $50 million from its targeted overhead from its operation.
In addition, these initiatives will strengthen its balance sheet and liquidity position. The company has cash and cash equivalents of $1.16 billion with more than $0.8 billion available under its secured credit facilities. Also, it has reduced its outstanding convertible debt by more than 20% to $154 million this year. Alpha has strong liquidity position of approximately $2.2 billion at the end of fiscal 2014.
The company can use these funds to rationalize its operations and in possible merger or acquisition and to pay of its rising debt of $3.90 billion. This strong liquidity position should add value to its growth in the long-run upon the improvements in the coal price and demand.
Some more positives
Moreover, the company should benefit from the lower oil prices. Alpha is one of the biggest users of diesel, with annualized usages of approximately 45 million gallons. The good news is that the company is targeting about 55% or 25 million gallons of this consumption towards the favorable market conditions that should contribute significantly to its top line growth this year.
These initiatives are good enough to survive in the short run, but the long-term growth will depend upon the improvement in the demand and prices for coal. This situation doesn’t look favorable in the short run. The oversupplied coal market amid the slower growth in the Chinese steel industry lower natural gas prices, the pace of economic growth and milder weather have pressurized demand and prices of coal.
So, overall market conditions remain very challenging for Alpha Natural Resources. Under such circumstances, the company is expected to ship about 69 to 80 million tons. This includes 14 to 17 million tons of Eastern metallurgical coal, 19 to 23 million tons of Eastern steam coal, and 36 to 40 million tons of Western steam coal. The Eastern metallurgical committed shipment has been priced at an average expected per ton realization of $82.88, while the Eastern steam coal is priced at an average expected per ton realization of $55.62 for fiscal 2015.
It expects the Eastern adjusted cost of coal sales per ton to be in the range of $58.00 to $64.00, while Western adjusted cost of coal sales per ton is expected to be between $10.00 and $11.00 for fiscal 2015.
Conclusion
Alpha Natural Resources sees great growth prospects for global thermal and metallurgical coal demand in the long-run that should increase its chances of delivering profits to its shareholders and investors. Meanwhile, it is executing various initiatives to remain in the run, while cutting down its losses. So, the stock doesn’t seem to be yielding in the short-run but will bounce back with the rise in the price and demand for coal in the future.
