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Alpha Natural Resources Increases Met Coal Shipments in Second Quarter

08/06/2013 - Alpha Natural Resources, Inc. said it continues to proactively address changing market conditions by optimizing its mine portfolio and idling additional uneconomic metallurgical and thermal coal capacity, and it anticipates additional actions may be required between now and the end of the year.

Alpha Natural Resources, Inc., a leading U.S. coal producer, reported a second quarter 2013 net loss of US$186 million compared with a net loss of US$2.2 billion in the second quarter of 2012 which included approximately US$2.5 billion of pre-tax impairment and restructuring charges.  Excluding the items described in the "Reconciliation of adjusted net loss to net loss," the second quarter 2013 adjusted net loss was US$129 million  compared with adjusted net loss of US$72 million  in the second quarter of 2012.
Earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) for the second quarter of 2013 was US$3 million, compared with an EBITDA loss of US$2.4 billion in the year ago period.  Excluding the items described in our "Reconciliation of EBITDA and Adjusted EBITDA to Net Loss," the second quarter 2013 Adjusted EBITDA wasUS$76 million, compared with US$186 million in the second quarter of 2012. 
"Alpha continues to proactively address changing market conditions by optimizing our mine portfolio and idling additional uneconomic metallurgical and thermal coal capacity, and we anticipate additional actions may be required between now and the end of the year.  At the same time, we remain focused on adjusting our overhead and capital expenditures in proportion with our changing operational footprint," said Kevin Crutchfield, chairman and CEO.  "In this environment, operational execution and the ability to implement thoughtful changes with alacrity are paramount to our success.  In addition, our commitment to safety has never been stronger as evidenced by the recent dedication of our Running Right Leadership Academy, an industry-leading training facility that will enable our workforce to gain critical skills and experience in a safe and controlled training environment.  The Leadership Academy is the first of its kind and will advance Alpha and the industry toward the goal of zero fatalities and a 50% reduction in lost time accidents."
Operationally, Alpha shipped 5.6 million tons of metallurgical coal during the second quarter of 2013, up 10% from the first quarter of the year.  Despite strong met shipments, the quarter was not without its challenges.  The global market for seaborne metallurgical coal remains oversupplied, further pressuring margins.  The market for export steam coal in the Atlantic basin is currently uneconomic for most, if not all, U.S. production.   Domestic utility inventories are decreasing, which should lead to a more balanced supply/demand picture in the future, but the domestic markets for Central Appalachian (CAPP) and Powder River Basin (PRB) thermal coals continue to be characterized by oversupply in the case of the former and the threat of oversupply stemming from latent capacity in the case of the latter.  In addition to these macro headwinds, Alpha experienced unexpected downtime at the Cumberland Mine and less favorable mining conditions at the Emerald Mine, both of which limited production and shipments of Alpha's relatively higher margin Pittsburgh #8 coal.  Increased unit costs at our Pittsburgh #8 longwalls primarily drove the sequential increase in adjusted cost of coal sales per ton from our Eastern operations in the second quarter.
During the second quarter of 2013, Alpha proactively continued to address its debt structure.  In early May, Alpha raised approximately US$335 million, net of underwriting fees, through the issuance of US$345 million aggregate principal amount of new 3.75% convertible senior notes due 2017, including the fully exercised over-allotment ofUS$45 million. The proceeds, together with approximately US$65 million of cash on hand, were used to fund purchases of approximately US$181 million of the Company's 2.375% convertible senior notes due 2015 and US$226 million of the 3.25% convertible senior notes due 2015.  Alpha also successfully amended and restated its secured credit agreement, increasing the company's revolving credit facility to US$1.1 billion, eliminating its accounts receivable securitization facility, replacing the previously outstanding US$525 million Term Loan A with a new US$625 million Term Loan B, and relaxing Alpha's financial covenant requirements through 2016. 
Together, these actions were designed to be essentially cash-neutral, and, as of June 30, 2013, Alpha maintained liquidity of approximately US$1.9 billion, including approximately US$1 billion in cash and marketable securities. 
According to Mr. Crutchfield, "Alpha has accomplished several key objectives with respect to its capital structure: 1) managing debt maturities by refinancing some maturities with longer-dated instruments; 2) reducing our 2015 maturities, which now stand at approximately US$400 million; 3) relaxing covenant requirements in order to weather a challenging market environment; 4) limiting potential equity dilution from the new 2017 converts with a 50% conversion premium; and 5) maintaining our cash and liquidity position."
Financial Performance
  • Total revenues in the second quarter of 2013 were US$1.3 billion compared with US$1.8 billion in the second quarter of 2012, and coal revenues were US$1.1 billion, down from US$1.6 billion in the year-ago period.  The decreases in total revenues and coal revenues were primarily attributable to lower average realizations for both metallurgical and steam coals, and lower steam coal shipment volumes.  Freight and handling revenues and other revenues were US$155 million and US$57 million, respectively, during the second quarter of 2013, versus US$233 million and US$49 million, respectively, in the second quarter of 2012.

    During the second quarter of 2013, metallurgical coal shipments were 5.6 million tons, essentially flat compared with the second quarter of 2012 and up from 5.1 million tons compared with the prior quarter (first quarter of 2013).  Alpha shipped 8.8 million tons of PRB coal during the quarter, compared with 10.2 million tons in the year-ago period and 10.0 million tons in the prior quarter.  Eastern steam coal shipments were 7.2 million tons, compared with 11.0 million tons in the year-ago period and 7.9 million tons in the prior quarter.  The average per ton realization on metallurgical coal shipments in the second quarter was US$100.95, down from US$127.83 in the second quarter last year and US$103.28 in the prior quarter.  The average per-ton realization for PRB shipments was US$12.37, compared with US$12.96 in the second quarter last year and US$13.03in the prior quarter.  The per-ton average realization for Eastern steam coal shipments was US$62.54, compared with US$65.05 in the year-ago period and US$61.90 in the prior quarter. 
  • Alpha recorded a net loss of US$186 million, or US$0.84 per diluted share, during the second quarter of 2013, compared with a net loss of US$2.2 billion, or US$10.14 per diluted share, during the second quarter of 2012.  The year-over-year decrease in Alpha's net loss is primarily attributable to the significant reduction in impairment and restructuring charges which totaled approximately US$2.5 billion in the year-ago period, but only US$11 million in the second quarter of 2013, partially offset by lower per ton realizations for metallurgical and steam coal and lower shipment volumes for steam coal in the second quarter of 2013.    

    Excluding the items described in our "Reconciliation of Adjusted Net Loss to Net Loss," the second quarter 2013 adjusted net loss was US$129 million, or US$0.59 per diluted share, compared with adjusted net loss ofUS$72 million, or US$0.33 per diluted share, in the second quarter of 2012.
  • EBITDA was US$3 million in the second quarter of 2013, compared with an EBITDA loss of US$2.4 billion in the year ago period.  Excluding the items described in the "Reconciliation of EBITDA and Adjusted EBITDA to Net Loss," adjusted EBITDA was US$76 million in the second quarter of 2013, compared with US$186 million in the second quarter of 2012. 
Year-to-Date Results
  • For the first six months of 2013, Alpha reported total revenues of US$2.7 billion, including US$2.3 billion in coal revenues, compared with total revenues of US$3.8 billion and coal revenues of US$3.2 billion during the first six months of 2012.  The year-over-year decreases in both total revenues and coal revenues were primarily attributable to lower average realizations for metallurgical and steam coal, as well as lower steam coal shipment volumes.   
  • During the first six months of 2013, Alpha's coal shipments totaled 44.5 million tons, compared with 54.9 million tons in the year-ago period.  Metallurgical coal shipments were 10.7 million tons year-to-date, compared with 10.5 million tons shipped during the first six months of 2012.  Shipments of PRB coal and Eastern steam coal were 18.7 million tons and 15.1 million tons, respectively, during the first six months of 2013, compared with 21.9 million tons and 22.5 million tons, respectively, during the first six months of 2012.  The year-over-year decreases in shipments of PRB and Eastern steam coal primarily reflect Alpha's actions to match production with demand.   
  • For the first six months of 2013, the company-wide average realization was US$50.91 per ton and the adjusted average cost of coal sales was US$45.84 per ton, resulting in a US$5.07 per ton (or 10%) adjusted coal margin.  By comparison, company-wide average realizations in the first six months of 2012 were US$58.33 and the adjusted average cost of coal sales was US$49.50, resulting in a US$8.83 per ton (or 15%) adjusted coal margin.  The decrease in adjusted coal margin was primarily attributable to lower per ton realizations, partially offset by lower adjusted costs of coal sales per ton, across all of Alpha's production, including Eastern metallurgical coal, Eastern steam coal and PRB production. 

    Year-to-date Alpha recorded a net loss of US$296 million or US$1.34 per diluted share, compared with a net loss of US$2.3 billion or US$10.29 per diluted share in the first six months of 2012.  Excluding the various items detailed in the attached "Reconciliation of Adjusted Loss to Net Loss," Alpha's adjusted net loss was US$233 million or US$1.06 per diluted share for the first six months of 2013, compared with an adjusted net loss ofUS$130 million or US$0.59 per diluted share for the first six months of 2012.  EBITDA for the first six months of 2013 was US$108 million, and Adjusted EBITDA, which excludes the various items detailed in the attached "Reconciliation of EBITDA and Adjusted EBITDA to Net Loss," was US$194 million, compared with an EBITDA loss and Adjusted EBITDA of US$2.2 billion and US$397 million, respectively, during the first six months of 2012.
Market Overview
During the second quarter of 2013, the global seaborne market for metallurgical coal deteriorated further due to increasing supply out of Australia together with the expectation of slowing Chinese steel production growth and the ongoing economic malaise in Europe and Brazil.  The third quarter Asian benchmark price was announced at US$145per metric tonne, down US$27 from US$172 per metric tonne in the preceding quarter, and recent spot transactions have been reported at levels approximately US$15 below the current benchmark.  Lower capacity utilization rates have allowed many steelmakers to lengthen cycle times in their coke ovens, enabling them to increase their reliance on lower quality metallurgical coals in order to manage their input costs.  While the market remains weak, lower rank metallurgical coal prices have changed little in the last several months and higher quality metallurgical coal prices have fallen, resulting in spread compression between different qualities. 
In the current market environment, a significant proportion of global production is uneconomic, and, consequently, production cutbacks have been widespread, with several cutbacks recently announced in Australia and the United States.  Thus, the market may begin to move back toward supply/demand balance.  In the intermediate to long run, the world is expected to require increasing volumes of met coal, and assuming market conditions improve—driven by the current dearth of new development projects in the face of today's challenging market conditions—we believe Alpha will be well-positioned to benefit from its leadership position in met coal reserves, met coal production and export terminal capacity.
2013 Outlook
On 15 July 2013, Alpha announced that production had been suspended at the Cumberland Mine due to adverse geological conditions in the mine's headgate area.  Production remains suspended and work continues to remediate the roof conditions at the Cumberland headgate.  The impact on Alpha's Eastern steam coal shipment volumes and Alpha's Eastern adjusted cost of coal sales per ton in the third quarter will in large part depend on completion of the ongoing remediation work.  With regard to Alpha's expected Eastern adjusted cost of coal sales per ton for 2013, we expect these unit costs to be similar to prior estimates for eastern operations other than the Pennsylvania longwall mines.  At those two high volume operations, adjusted cost of coal sales per ton are now expected to be higher than previous estimates as a result of mining conditions and ventilation issues experienced in the second quarter and the adverse geologic conditions presently being experienced at the Cumberland mine.
Currently, Alpha expects to ship between 83 and 91 million tons during 2013, including 19 to 21 million tons of Eastern metallurgical coal, 27 to 30 million tons of Eastern steam coal, and 37 to 40 million tons of Western steam coal out of the PRB.  As of 17 July 2013, 88% of the midpoint of anticipated 2013 metallurgical coal shipments were committed and priced at an average per ton realization of US$102.20.  Based on the midpoint of guidance, 98% of anticipated Eastern steam coal shipments were committed and priced at an average per ton realization of US$62.66; and 100% of the midpoint of anticipated PRB shipments were committed and priced at an average per ton realization of US$12.64.  The Company's 2013 adjusted cost of coal sales is expected to range between US$72.00 and US$76.00 per ton in the East and between US$10.00 and US$10.50 per ton in the West.  SG&A expenses are anticipated to range from US$140 million to US$160 million for 2013.  Interest expense and DD&A expense are anticipated to be in the ranges of US$235 million to US$245 million and US$875 million to US$950 million, respectively, and capital expenditures for 2013 are expected to fall within the range of US$275 million to US$325 million.
Alpha Natural Resources is one of the largest and most regionally diversified coal suppliers in the United States. With mining operations in Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming, Alpha supplies metallurgical coal to the steel industry and thermal coal to generate power to customers on five continents.  Alpha is committed to being a leader in mine safety with our Running Right safety process, and an environmental steward in the communities where we operate.