Alpha Natural Resources: An in-depth analysis (Part 6 of 9)
Better than expected results
Given the current weak coal market conditions, it is not surprising to see that Alpha (ANR) has been unprofitable for past few quarters. However, in its earnings report last month, Alpha reported a loss of $0.52 per share beating analysts’ estimates of -$0.61 for 4Q 2013 mainly due to effective cost control methods by the management. The company did unfortunately see a drop in revenues as compared to the previous year. It has reported 4Q revenue of $1.09 billion as opposed to $1.56 billion a year ago. This drop was mainly due to a 26.8% decline in Freight & Handling revenues and the lower coal prices, which contributed to an 11% drop in realized price per ton of coal.
Credit rating and analyst outlook
In the recent month, right after Alpha received the fine from EPA, analysts from Goldman Sachs downgraded Alpha from a Neutral to Sell with a price target of $4.00 from $6.00. The harsh downgrade from Goldman is attributable to multiple factors.
First is a very challenging metallurgical coal outlook where analysts expect the current $150 per metric ton to drop to $141 in the near future. The management team at Alpha has also stated that they expect to see lower metallurgical prices over the next few years. This is especially damaging for Alpha as a significant bulk of its revenue is derived from metallurgical coal sales. Note that weaker coal prices also affect other major coal producers globally (KOL) and locally like Arch Coal (ACI), Peabody Energy (BTU), and Consol Energy (CNX).
Second is Alpha’s higher metallurgical cost structure, decreasing margins, and higher leverage levels. Third is the oversupply of coal in the U.S., which might worsen over the next few years. Last is the significant fine that Alpha has to pay due to violations of the Clean Water Act which is discussed in greater detail in the next part of this article series.
Just last year in October, Moody’s said that Alpha’s outlook is stable despite downgrading the company’s ratings. The rational for the downgrade was mainly due to the continued weakness in the coal industry as a whole. Moody’s also stated that Alpha’s liquidity position of around $1 billion in cash is good, and the company will have no problem addressing its required debt payments and other expenses in the near future.
Browse this series on Market Realist:
- Part 1 - A must-know investor’s guide to Alpha Natural Resources
- Part 2 - Alpha Natural Resources’ dominant presence in the US mining basins
- Part 3 - Alpha Natural Resources: Revenue generation and other advantages
- Commodity Markets
- Alpha Natural Resources