Alpha’s management expectations and outlook for the year 2014

Market Realist

Alpha Natural Resources: An in-depth analysis (Part 8 of 9)

(Continued from Part 7)

Controlling costs in a tough coal market

As a whole, the company’s ability to survive the weak coal market conditions is almost solely dependent on the management’s ability to control costs and ensure that they have a steady flow of revenue through their operations.

The management team expects to see a reduction of SG&A expenses in 2014 to a range of $110 million to $140 million compared to $159 million in 2013. Also, the company intends to reduce its cost to mine in the eastern coal segment by 7% in 2014. So far, the company has not exactly been very effective in controlling the costs. Even though the company beat recent analysts’ expectations in its recent 4Q financial result, the management team still has a lot of work to do to make Alpha profitable.

In 2014, Alpha (ANR) expects to ship a total of 77-90 million tons of coal compared to 86.9 million tons in 2013. The management expects decreasing coal supply growth on their end due to a drastic reduction of capital spending on new mines since 2012. Plus, few mines are scheduled to come online in the coming years which limits the growth of coal supply on Alpha’s end.

Changes to capital expenditure

Alpha’s management team initially expected to see a slight rise in capital spending in 2014 to $275 million from $207 million in 2013. However, due to a recent pollution violation fine by the EPA, Alpha will be expected to spend an extra $200 million on top of its $275 million expected for 2014 to upgrade existing and install new equipment for waste water treatment systems. The upgrades will reduce pollution discharges from a total of 79 active coal mines and 25 coal processing plants in the Appalachian region.

Likewise for every coal production company (KOL), capital spending comprises a large portion of the companies’ expenses. Most noticeably, major players like Arch Coal (ACI), Peabody Energy (BTU), and Consol Energy (CNX) have focused and spent a lot in capital spending to get to their dominant position in the industry.

Alpha was also ordered to pay a $27.5 million fine with regards to over 6000 violations in water pollution limits in state issued permits. In some cases, the violations exceeded the allowed limits as stated in their permits by over 35 times. To date, this is the largest fine ever issued of its kind. Note that more than half of the violations came from one of their acquired companies in 2011, Massey Energy. Such fines are not unfamiliar to Massey as it has been fined $20 million in 2008 for similar violations of water pollution laws.

While the management team has been making efforts to cut costs in their coal operations with respect to idling less profitable mines, they must also take extra precaution from such fines, as this will have a significant impact on the company’s 2014 financial performance. Coupled with the weaker coal prices that are expected, Alpha is poised to face a very challenging year ahead despite the cost cutting measures taken by the management team.

Continue to Part 9

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