Coal Plunge Pushes Alpha Natural Creditors Toward DistresMatt Robinson and Sonja Elmquist
The plunge in coal prices that’s put smaller competitors into bankruptcy is alarming Alpha Natural Resources Inc. bondholders as the second-largest U.S. producer consumes more cash than ever before.
The company’s bonds have lost 9.09 percent this year, the most among metallurgical coal producers in the Bloomberg USD High Yield Corporate Bond Index. Investors now demand 9.67 percentage points more in yield than comparable Treasuries to hold its $800 million of notes due in June 2019, within a half-percentage point of levels considered distressed.
Since spending $7.1 billion on Massey Energy in the industry’s most-expensive takeover just as steelmaking coal prices peaked in 2011, Alpha has failed to turn a profit as Chinese demand slowed and Australian rivals boosted supply. The 66 percent drop in coal prices in the past three years, which sent James River Coal Co. and Patriot Coal Corp. into bankruptcy protection, has analysts predicting Alpha’s cash burn will double to a record $216.8 million this year.
“It’s an ugly situation,” Andy DeVries, an analyst at New York-based CreditSights Inc., said in a telephone interview. “It’s going to get worse before it starts getting better. It’s a completely oversupplied market.”
After three straight years of losses, analysts forecast Alpha will lose more money this year and next. The company’s $3.43 billion of debt is now equal to 37.9 times its earnings before interest, taxes, depreciation, and amortization, the highest on record and the most among U.S. coal producers.
Steve Higginbottom, a spokesman for Bristol, Virginia-based Alpha, declined to comment on price changes of its bonds, citing the company’s quiet period before it reports first-quarter earnings May 1.
Since peaking at a post-crisis closing high of $67.38 in January 2011, the same month it announced the Massey deal, the shares plunged 94 percent to $4.28 at 1:06 p.m. in New York. The acquisition valued Massey at 25.2 times its Ebitda, more than any coal takeover of at least $1 billion, data compiled by Bloomberg show.
Investors are betting the stock will fall further with the number of shares sold short rising more than fivefold to 24 percent from 4.3 percent last April, according to data compiled by Markit, a London-based provider of financial data.
Standard & Poor’s lowered its rating on Alpha on Dec. 9 to B, five levels below investment grade, from B+, saying it doesn’t expect a “material improvement” in coal prices. Moody’s Investors Service cut its grade in October to an equivalent B2.
To reduce supply, UBS AG estimates that U.S. miners will cut production by 9 million tons this year, out of 85 million tons produced last year. Alpha announced plans in September to trim metallurgical coal output by 278,071 tons at its Laurel Mountain mine in Virginia. The company now plans to produce 16 million to 20 million tons of metallurgical coal this year. Walter Energy Inc. announced today it will idle mines in British Columbia because of the low prices.
“Given the balance-sheet conditions, companies can’t afford to just sit on their hands and watch their liquidity situation erode,” Kuni Chen, a New York-based analyst at UBS, said in a telephone interview.
Australian producers are boosting output even as economic growth in China, the biggest steelmaker, declines. BHP Billiton, and Anglo American Plc are among companies expanding mines, leading Goldman Sachs Group Inc. to estimate the country’s exports will rise to 274 million tons this year. Australia is the biggest metallurgical coal exporter.
Metallurgical coal prices reached a record $330 a metric ton in 2011 as flooding disrupted production. Prices tumbled to $113 a ton on April 3, according to data from Energy Publishing Inc.
James River filed for bankruptcy this month even after idling a dozen mines because of the drop in coal prices. Patriot Coal, one of the largest U.S. producers by volume, exited Chapter 11 bankruptcy in December after filing for reorganization in July 2012.
The forecast cash burn, or negative free-cash flow, at Alpha will accelerate from $106.6 million last year, data compiled by Bloomberg show. The company last reported net income in 2010.
Alpha was formed in 2002 and has grown by acquiring assets from companies such as Moravian Run Reclamation Co. and Progress Fuels Corp., according to the company’s website.
The company’s $800 million of 6 percent notes have declined from last year’s high of 95.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The extra yield investors demand to hold the securities rather than government debt climbed to a record 10.44 percent March 26.
“It’s going to be a while before things turn around,” Evan Mann, a New York-based analyst with bond-research firm Gimme Credit LLC, who rates the bonds underperform, said in telephone interview. “People were hoping this year the coal business would start to rebound.”