On Sep 26, we issued an updated research report on met coal producer Walter Energy Inc. (WLT). Walter Energy like other coal miners is having to deal with the currently soft coal market conditions in the U.S. The World Steel Association had predicted a 3.1% increase in steel usage in 2014 which was expected to drive met coal demand.
Despite the predictions, overall demand for met coal is yet to reach the expected levels. Walter Energy has idled its Wolverine and Brazion mining operations in British Columbia in response to the weak coal market. The company however possesses high quality met coal mines which can be fully utilized once demand picks up.
This stock reported a loss of $1.96 in second-quarter 2014, much wider than the Zacks Consensus Estimate of a loss of $1.76. Softness in the sales price per ton practically ate away the benefits of a higher sales volume.
Softness in coal demand has also impacted other operators in this space, namely Suncoke Energy Partners(SXCP), CONSOL Energy Inc. (CNX) and Hallador Energy (HNRG). All of these stocks have registered negative earnings surprises like Walter Energy in their last reported quarter.
Transportation bottlenecks are also weighing heavily upon the U.S. coal miners. During the second quarter release, Walter Energy lowered its met coal sales volume guidance to a range of 9.5–10.5 MMTs from the prior expectation of 10.5–$11.5 MMTs. The lowered sales volume forecast was primarily due to Walter Energy’s principal coal transportation provider at the Brule mine in Canada discontinuing operations effective Jun 1.
Apart from idling coal mines to cope with the slackness in demand, the company is also trying to lower its operating costs. Cost containment efforts have yielded results with Walter Energy lowering its selling, general and administrative expenses significantly by 29.9% year over year in the second quarter.
Walter Energy also has to fend off stiff competition from seaborne coal exporters from Australia and Indonesia. These operators enjoy a locational advantage as they are nearer the prime steel-hungry markets of Asia.
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