Sunday, July 20, 2014

More Thoughts On Walter Energy

Walter Energy's cash may be seriously eroding with these metallurgical coal prices (mentioned by an Australian competitor), which are down significantly from the first quarter.

"Whitehaven’s metallurgical coal achieved an average price of $US93.63 a tonne in the June quarter, which it expects to fall to as low as $US91 a tonne in the current quarter."
By comparison, in Walter's Q1 2014 report, it disclosed that its
"average selling price of hard coking coal in the first quarter of 2014 was $127.39 per metric ton, representing a 19.0% decrease from the average selling price of $157.28 per metric ton for the same period in 2013."
So, we are talking about a sales price that has fallen significantly from Q1. Speaking of Australia, you have to understand what happened over the past four years in metallurgical coal to understand the problem Walter Energy is having:
"Australian met coal producers have an advantage over U.S. ones due to a freight and quality advantage, so U.S. met coal producers have a better shot at domestic use and at selling to European consumers. U.S. producers are marginal producers, particularly susceptible to decreases in demand because they have higher freight costs and lower quality coal.

Flooding in Australia in 2010-2011 caused a met coal supply shock, pushing up the prices of iron ore, steel, and especially met coal. At the same time that this supply shock abated, the frenzy of construction in China and therefore demand for steel has started to slow."
Unfortunately, in November 2010 - during this temporary supply shock that also occurred during a demand shock of China using an unsustainable amount of basic materials (i.e. "top of cycle") - Walter Energy decided to go out and pay $3.25 billion for Western Coal. From a December 2010 press release:
"This is a transformative transaction at a time when global demand for metallurgical coal is surging," said Joe Leonard, interim chief executive officer of Walter Energy. "Western Coal has an attractive high-quality metallurgical coal asset base and has embarked on an organic growth strategy that is expected to increase production more than 60 percent by fiscal 2013. It is a unique strategic fit with Walter Energy's large scale, high-productivity mines which produce premium-quality metallurgical coal for customers in South America and Europe. Our combined production capacity and geographic footprint leaves us extremely well positioned to benefit from favorable sector dynamics driven by increased steel production in markets such as China, India and Brazil. Bottom line, this is the right transaction at the right time."
Speaking of Australia, you never want to hear that your lower cost competitors are "holding up well" selling below your cash cost.
"Australian producers of metallurgical coal are holding up well at today’s 'extremely low' prices, and said only a few operators were incentivised to close mines"
A correspondent writes, "Yep, this is how markets for commodities clear. High cost producers have to shut down."

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