Key investor takeaways from Walter Energy's 1Q14 earnings (Part 2 of 8)
Lower average net selling price
Price is usually the key driver of commodity companies. Over the last three years, Walter Energy’s (WLT) poor performance, as well as the Market Vectors Coal ETF’s (KOL) poor performance, was largely driven by weakness in metallurgical coal prices. This was no different during the first quarter, when the company’s average net selling metallurgical coal price fell 17% from the same period a year ago. Average net selling price in the United States fell from $157 per metric tonne to $127, while net selling price for Canadian coal fell from $144 to $124 per tonne.
Like most other metallurgical (coking coal) producers, Walter Energy sells most of its metallurgical coal under fixed-price supply contracts, primarily based on pricing terms of three months and volume terms of up to one year.
Since coking coal quality differs from mine to mine and company to company, higher-quality coals sell at higher prices, which affects companies’ profits. However, it’s important to know that these coals are largely substitutable to each other. So even if a company produces higher-quality coal than others, if prices for lower-quality coal fall, it will still negatively affect higher-quality producers.
Investors should also note that whether companies such as Walter Energy, Consol Energy (CNX), Peabody Energy (BTU), and Alpha Natural (ANR) sell higher-quality coal or lower-quality coal is largely priced into a stock. So what really affects whether a company’s share price will go up or down depends on changes in coking coal prices (see the chart above). In most cases, this is driven by market supply and demand. However, selling prices can also change depending on the quality of coal produced, which depends on the quality of coal mines and the stage of mining.
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