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Wider-than-Expected Loss at Walter Energy

Zacks Equity Research

Metallurgical coal producer Walter Energy Inc.’s (WLT) operating loss per share of $1.68 per share in the third quarter of 2013 was wider than the Zacks Consensus Estimate of a loss of $1.01. In the year-ago quarter the company reported earnings of 48 cents.


Walter Energy’s total revenue of $455.8 million in the third quarter was down 25.5% from $611.9 million in the year-ago period.

The decline was primary due to lower met coal prices which ate into high coal sales volume.

The top-line results were marginally lower than the Zacks Consensus Estimate of $458 million.

Highlights of the Quarter

During the quarter, Walter Energy’s metallurgical coal production reached 2.8 million metric tons (MMTs), increasing 7.7% from the year-ago quarter. The output consisted of 82% met coal and 18% pulverized coal injection (PCI) coal.

Total cash cost of met coal sales per metric ton (MT) during the quarter was $117.95, down 10.8% from the year-ago level. This reflects a 32.0% decline in the selling price of hard coking coal ("HCC") to $133.72 per MT and a 24.1% decline in the selling price of low-vol PCI to $121.76 per MT.

The company continues to benefit from its cost-cutting measures. Selling, general and administrative expenses were $21.9 million, down 32.6% from $32.5 million in the year-earlier quarter.

Interest expenses were $63.5 million versus $30.5 million in the prior-year quarter. The increase in expenses was primarily due to the issue of new debts bearing higher interest rates.

Financial Update

The company continues to maintain a healthy cash balance. The available liquidity at the end of the quarter was $614.0 million, consisting of cash and cash equivalents of $293.1 million plus $320.9 million of availability under the company’s revolving credit facility. In addition, the company amended its credit facility in Jul 2013 to increase its financial flexibility.

During the reported quarter the company issued $450 million in senior notes due in 2019. Long-term debt as of Sep 30, 2013 was $2.77 billion versus $2.40 billion as of Dec 31, 2012.

In the third quarter, capital expenditure was $28.5 million, a 66.6% decline from the year-ago quarter. The decline in capital expenditure reflects Walter Energy’s capital discipline in the face of a worldwide decline in met coal demand.

Walter Energy is on track to make capital expenditure of $150 million in 2013.


Walter Energy expects to achieve 2013 met coal production target of 11 MMTs. The company also expects its fourth quarter coal production to surpass the third quarter level as its Wolverine mine is moving into a more favorable phase in its mining cycle.

The company is planning to lower its met coal production costs on a per ton basis by 15% year over year.

Other Company Releases

Peabody Energy Corp. (BTU) reported third quarter 2013 earnings of 5 cents per share, widely beating the Zacks Consensus Estimate of a loss of 3 cents.

SunCoke Energy, Inc. (SXC) released its third quarter results with earnings per share of 9 cents beating the Zacks Consensus Estimate of 7 cents by 28.6%.

Arch Coal, Inc. (ACI) reported third quarter 2013 loss of 1 cent per share, much narrower than the Zacks Consensus Estimate of a loss of 30 cents

Our View

The performance of Walter Energy in the reported quarter was lower than expected. The softness in the sales price per ton prevented the company to realize the benefits of a higher sales volume.

Walter has taken significant steps to cut down its operational costs, with no debt maturities till Jun 2015. The company could concentrate more on developing its existing assets and take more initiatives to control expenses.

Asian countries like China, Japan and Korea will primarily drive the demand for met coal. In Latin America, demand for met coal is expected to rise in Brazil due to its infrastructure development efforts for the approaching World Cup and Olympics. Though Walter Energy is competent its ability to win contracts will be tested as other met coal operators will also look to grab the opportunity.

Walter Energy currently has a Zacks Rank #3 (Hold). With a market capitalization of $0.96 billion, the company has 4,100 full time employees.

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