Alpha Natural Resources: An in-depth analysis (Part 4 of 9)
Where are Alpha’s customers located?
Alpha’s (ANR) production and coal exports serve a wide variety of customers spread out in over 26 countries worldwide. As of fiscal year 2013, it serves a total of 170 different customers globally. Of Alpha’s entire proven and probable reserves, 78% are classified as low sulfur reserves and 69% as high Btu content coal. The general rule of thumb is that the higher the heating capability and lower the sulfur content, the more valuable the coal would be. So, Alpha’s portfolio of coal supply would allow it to provide greater value to its customers. Some of the company’s biggest and long term customers are major players in public utilities and steel manufacturers. Alpha’s top ten customers accounted for approximately 43% of 2013’s total revenue, and its largest customer accounted for around 9% of 2013’s revenue.
Most of Alpha’s yearly coal sales are derived from long-term supply agreements with its customers that specify the quantity, quality, and price of which coal will be sold. In 2013, about 43% and 69% of its steam and metallurgical coal sales volume, respectively, were sold through long-term supply agreements. These agreements which typically last longer than a year are based upon the quantity of coal supplied and the price at which they would be traded. Such agreements allow the company to lock in a set amount of revenue and supply to ensure a more stable revenue flow.
Note that it is the industry standard for global coal companies (KOL) to include a price reopener in the long-term supply agreement should there be large fluctuations in the current market prices of coal. Major players in the industry like Arch Coal (ACI), Peabody Energy (BTU), and Consol Energy (CNX) actively partake in long-term supply agreements.
How Alpha reaches its customers
For Alpha’s customers, coal is usually delivered through the engagement of transportation providers such as railroads, trucks, barge lines, and terminal facilities. In 2013, approximately 67% of total shipments to customers were delivered through rail and about 8% through barges on rivers. The company’s heavy reliance on rail transportation providers like CSX, Norfolk Southern, BNSF, and Union Pacific can be seen as a risk if there were to be a delay in shipment; Arch Coal (ACI) faced a very difficult 4Q 2013 due to delays and disruptions from its rail service provider.
Click here for a link to a review of Arch Coal’s earnings call.
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