Walter Energy Inc. posted a wider-than-expected loss in the first
quarter of 2014 due to soft coal market conditions in the U.S. The
company underperformed primarily due to downward pressure in
thermal as well as met coal prices. We believe Walter Energy's
cost-control initiatives and systematic idling of uneconomic mine
operations in Canada will lead to stable margins in the upcoming
quarters. In addition, the oversupply in the global met coal market
will gradually disappear in the long term as bullish steel demand
overseas will drive met coal exports. However, stiff competition
from prime coal exporters like Australia and Indonesia as well as
failure to renew customer contracts could act as growth deterrents.
Tampa, Fla.-based Walter Energy Inc. is one of the leading U.S.
producers and exporters of premium metallurgical (met) coal to the
global steel industry. The company also has a steam/industrial coal
mining business, although much smaller in size than its
metallurgical operations. It also produces metallurgical coke and
coal bed methane gas. It owns a Birmingham, Ala. based
manufacturing unit of coke and coke byproducts. Its de-gassing
division, also headquartered in Alabama, extracts coal bed methane
gas (natural gas) through an equally-owned joint venture with the
exploration and production subsidiary of El Paso Corp. (EP). In
2013, the company's revenue was roughly $1.8 billion and it
employed nearly 3,600 in the United States, Canada and United
Walter produces metallurgical coal through its subsidiary Jim
Walter Resources (JWR) consisting of Jim Walter Resources mines
No.4 and No.7 steam coal and industrial coal through its Walter
Minerals subsidiary Tuscaloosa Resources (TRI) and Taft Coal &
Sales (Taft) and metallurgical coke through its Walter Coke
subsidiary (formerly Sloss). It is also a significant producer of
natural gas. In 2013, met coal production totaled 11.5 million
metric tons, of which 84% was hard coking coal and the balance
low-volatile Pulverized Coal Injection (PCI) coal. In addition, the
company's natural gas business produced 12.1 billion cubic feet of
gas in 2013. Walter Energy possessed 386.3 million metric tons of
total recoverable coal reserves at the end of 2013.
Currently, the company reports in three operating segments the
U.S. Operations segment, the Canadian and U.K. Operations segment
and the "Other" segment. Both the U.S. Operations and Canadian and
U.K. Operations reportable segments' primary business is that of
mining and export of hard coking coal for the steel industry.
The U.S. Operations segment comprises Walter's historical
Underground Mining, Surface Mining and Walter Coke operating
segments, along with the West Virginia mining operations (part of
the Western Coal acquisition) and the North River Mine.
The Canadian and U.K. Operations segment include mining
operations in northeast British Columbia (Canada) and in South
Wales (United Kingdom), both of which came into its ambit through
the Western acquisition.
The Other segment primarily consists of corporate activities and
REASON TO BUY
Walter Energy remains well-positioned with its strong met coal
portfolio. Currently, the company continues to focus mainly on its
two deep underground mines Mine No. 4 and Mine No. 7. With long
wall operations already completed at Mine 4, Walter Energy's met
coal production prospects look stable which will enable the company
to meet increasing future coal demand. In the first quarter of
2014, hard coking coal output from the U.S. rose 18.8% year over
year to 2.1 million metric tons thanks to the company's premier
Globally, demand for met coal is expected to rise primarily on
the back of higher electricity production in Asian countries,
mainly in India, China, Japan and South Korea. As per the World
Steel Association, met coal demand will likely improve by 3.1% in
2014. These markets are likely to drive steel demand led by the
rising automotive, shipbuilding and construction sectors. In
Brazil, steel demand is estimated to grow by 3% in the next few
years as steel giant Arcelor has restarted a plant which is
expected to reach full capacity over a span of 6 years. Although
Europe is currently plagued with political and economic
uncertainties, steel markets in Germany, Italy and U.K. experienced
healthy growths in the first quarter, reflecting a good start in
these regions. Steel consumption in Europe will likely increase by
2% in 2014 as per the World Steel Association. With recoverable
coal reserves and positional advantage in West Virginia, Alabama
and the U.K., Walter Energy's thermal coal order book is expected
to improve in the future.
We appreciate Walter Energy's "Controlling the Controllable"
effort in tackling the soft coal market conditions in the U.S. The
company continues to achieve success in its cost-containment
efforts with production cost per ton declining 23% year over year
in first-quarter 2014 while the cash cost sales per ton for met
coal improved 10% compared to the year-ago period. Apart from
curtailing production cost, Walter Energy also reduced its selling,
general and administrative expenses significantly by 32.6% from the
year-ago comparable period. In addition, Walter Energy is
systematically idling production operations in the Canadian mines
which are uneconomical given the current low coal price environment
in the domestic market. The combination of cost-efficiency and
controlled production will lead to stable margins.
Walter Energy effectively maintains a disciplined balance sheet
along with a flexible liquidity portfolio. The company's available
liquidity as of Mar 31, 2014 was $676 million, up by over $100
million from the year-ago figure. In addition, cash and cash
equivalents of $405 million at the end of Mar 31, 2014 increased
more than 55.2% from year-end 2013 primarily due to improvement in
cash flow from operating activities. Walter Energy also has $271
million under its revolving credit facility. A strong financial
position will allow the company to effectively finance its targeted
ventures and refinance its debts. The company currently has no
significant debt maturities till Apr 2018.
Walter Energy Inc. (WLT): Read the Full Research
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