Alpha Natural Resources NYSE:ANR engages in the production, purchase and sale/resale of thermal and metallurgical coal. Since 2002 when it was established by affiliates of the First Reserve Corporation, it has experienced tremendous growth (in 2005 it had an IPO under $400 million, after the 2011 acquisition of Massey Energy it will have a market value of around $13 billion). As the leading exporter of metallurgical coal from the U.S., ANR is pursuing opportunities to capitalize on tight global supplies and sustained buyer interest from a number of foreign countries. Strong global steel production, coupled with high ocean freight rates and weather and logistical problems encountered by Australian producers, has created opportunities for unplanned metallurgical coal sales overseas this year. China will continue to remain a large importer of coal as well as the country has a large supply of coal but lacks the necessary infrastructure to extract the commodity to meet demand. After the combination with Massey Energy Alpha will operate 150 coal mines and half of its workforce will be in West Virginia. Though shareholders of both companies approved overwhelmingly the takeover only about 3/4 of them showed up to vote. The Massey Energy deal adds 2.8 billion tons of copper 2P reserves. That's up significantly from 2007 when it operated 65 coal mines (38 underground, 27 surface) and 10 coal preparation plants. Massey's Big Branch Mine (lengthy closure in 2010 due to explosion) used to account for about 1/6th of the company's metallurgical coal shipments. As of March 2011 China is on track to import between 45 and 50 million tons of coking coal (steel making), considering the effect of Australia's flood problems (flooding reduced Queensland's production by more than 15 million metric tonnes, coal exports from Queensland were 15% higher in 2010 than 2009 up to 183.1 million tonnes ended June 2010) Alpha Natural Resources will inevitably face heavier demand (for 2011 the United States is on on pace to export 100 million tons of coal 25% more than it did in 2010). Even though Alpha's price realization per ton has been underwhelming (between 45 and 55 dollars from 2009 into 2011), in the first quarter of 2011 46% of the metallurgical coal it sold commanded more than $324/tonne. The newly acquired West Coal division is largely responsible for the weighing down of consolidated unit prices (sales by West Coal more than doubled in 2010). In March 2011 Massey Energy reported 7,613 employees up from 5951 in March 2010.
The company has business segments based on the region they operate in - Eastern Coal Operations (North-Central Appalachia) and Western Coal Operations (Powder River Basin, Wyoming). All other assets including discontinued mines and royalties/leasing of mineral rights/terminal services are included in the other division. As of December 2010 the company had 2.3 billion tons of 2P (proved + probable) coal reserves (5.1 billion tons when Massey Energy was integrated into the company in June 2011). Coal production is done using a highly effective removal method (removed 90% of the coal in a pit), it involves removal of earth using front end loaders which have large shovels used to remove/refill earth.
97.4% (82.6 million tons) of the coal sold was produced by the company the other 2.2 million tons was purchased and resold (73% of the resold coal was combined with its own coal though none of it required further processing).
In 2010 it embarked on a joint venture with Rice Energy, LP to develop 20,000 acres of Marcelles land in Pennsylvania (shale natural gas/coal).
Alpha Coal West - business unit operating out of the Powder River Basin where it overses the Belle Ayr (25.8 million tons produced in 2010) and Eagle Butte mines and employees 660 people. In 2010 the entire division produced 49 million tons of coal from areas which have 653.2 million tons in reserve. Power plants in the South-Mid West use most of the coal.
Virginia and Kentucky (1,385 employees) - produced 7.3 million tons of coal in 2010 (9% of company total) at Paramount (8 mines high btu/low sulfer - 57.5%), Enterprise (2 underground mines 2.2 million tons in 2010) and Dickenson-Russell (3 underground mines produced 0.9 million tons (1% of total) in 2010))where reserves amount to 354.9 million tons (15% of total, though half of that is located at inactive mines). At Enterprise coal is transported by truck to 2 facilities where it is processed then transported by train to terminal end points.
Other - incorporates a wide range of business including property leasing, royalty arrangments and road construction.
Since 2008 Alpha's business has become much less reliant on purchased coal (6.2 of 26.9 million tonnes in 2008 (23.0%) compared to 2.2 of 84.8 million tons (2.6%) in 2010.
December 2010 - 2.3 billion tons of 2P coal reserves 63% of which is low sulfer (84% of that under 1%) meaning the company has enough coal to keep production at current levels for over two decades. 64% of the 2P reserves have a higher than normal heat value (over 12,500 Btu) meaning the produce more energy when burned. Companies with facilities unable to scrub sulfer content from the coal when its burned are able to bypass that by blending it with low sulfer coal making low sulfer coal increasingly valuable (over half of Alpha's has a content less than 1% far lower than the 1.5% permitted by definition).
Demand for coal comes mostly from power generators (thermal/doesn't require high btu content) for the generation of electricity (980 million tons or 86.8% of total USA demand in 2010 up from 937 million tons (88.5%) in 2009 but lower than the 1.04 billion tons demanded in 2007 and 2008. Industrial accounts for 1/3 of the rest (48 million tons in 2010) and most of the rest going to exports (77 million tons up from 59 the year before). The USA is home to 29% of the world's coal reserves.
|cost (coal sales)||58.75%||2,566,825||1,616,905||1,627,960||1,352,450||1,184,092|
|disc. oper loss||(883.25)%||(1,667)||(14,278)||(33,388)||0||213|
On May 19, 2010 Alpha Natural Resources authorized a share repurchase program in which allows it to purchase $125 million worth of outstanding stock.
2010 - At year's end the company operated 66 mines and 13 coal preparation plants throughout north-central Appalachia and the Powder River Basin. It had an annual coal production capacity of 90 million tons and was a nationwide leader in the supply of metallurgical coal (industrial applications); (after the 2.1 billion merger with Foundation Coal on July 31, 2009; Foundation was the surviving company however it inherited the Alpha name in a reverse acquisition). In 2010 the fraction of volume sales from steam coal rose from 83% to 86%.
The thermal demand comes from power stations/utilities in the USA and Canada (and thus is directly affected by the seasonality of household demand). The lower demand from the American steel industry caused demand for metallurgical coal to wane (down to 14% of total volume sales from 17% in 2009).
Lowered exposure to the steel sector is good for Alpha both because of the problems faced by the industry in post recession America and the direct consequence of it; More exposure to the thermal coal demanding power industry at a time when one of coal's main substitues, nuclear energy is facing new environmental and safety issues.
Divisional breakdown - In 2010 Western Coal operations were the source of 48.977 million tons of steam coal sales, 136% higher than in 2009; Eastern Coal operations were the source of 24.001 million tons (31% higher than in 2009). Though Western Coal sold more Eastern Coal realized higher net revenue per ton ($67.07/ton up 3.5% on the year) than Western Coal ($10.95/ton up 4.6%). For Western Coal : Although Revenue was $325.5 million higher (from 28.2 million tons more shipped) costs rose by $267.2 million leaving only $58.3 million of the added sales revenue for EBITDA. For Eastern Coal : ebitda rose 29% (by $154.3 million) attributable to higher metallurgical coal demand (by 3.7 million tons or 46% 1.3 million of which was due to the addition of Foundation Coal). Costs were up markedly due to higher production of high cost metallurgical coal/lower production from low cost longwall mines. The purchasing of more coal by Eastern Coal pushed costs higher.
Eastern Coal - In 2010 organic growth contributed a 31% increase in steam coal shipments (5.7 million tons) while the combination with Foundation Coal added another 7.5 million tons.
Quarterly revenue declined -29.2% to $1.6339 billion while earnings went from a profit (GAAP 28 cents per share) to a loss (GAAP 21 cents per share) due mostly to lower realized coal prices (-18.7% --> $52.17/ton). Still though, the company bottom line was better than the expected loss of 44c a share, leading to positive reaction from the market.
Alpha Natural Resources is headed by , Mike Quillen who is 58 years old and serves as chairman and CEO, and has strong experience in the coal industry. From September 1998 to December 2002, Mr. Quillen was Executive Vice President Operations of AMCI Metals and Coal International Inc., a mining and marketing company, where he headed an initiative to develop AMCI’s Australian properties. He has held senior executive positions in the coal industry throughout his career, including as Vice President Operations of Pittston Coal Company, President of Pittston Coal Sales Corp., Vice President of AMVEST Corporation, Vice President Operations of NERCO Coal Corporation, President and Chief Executive Officer of Addington, Inc. and Manager of Mid-Vol Leasing, Inc.
|Balance Sheet mil USD $||Total assets||Current assets||Total equity||Long term debt||Cash equivalents|
•High Quality Reserves and Capacity to Meet Demand: ANR is a small-cap coal company with 70 mines and high-quality coal reserves. ANR is able to create extra value by blending coal qualities to meet client needs. ANR has low sulfur, high BTU coal. Approximately 82% of reserves are low sulfur reserves, with approximately 57% having sulfur content below 1.0%. Approximately 91% of total proven and probable reserves have a high Btu content which creates more energy per unit when burned compared to coals with lower Btu content. The company believes that our total proven and probable reserves will support current production levels for more than 20 years. Approximately 4 percent of ANR’s planned thermal production remains uncommitted for 2008 and approximately 58 percent is uncommitted for 2009.
•Catalysts: Catalysts include the continued increases in dry bulk shipping prices because of demand from emerging markets, and increased metallurgical coal prices due to favorable market conditions.
•Favorable Coal Market Fundamentals: Thermal coal prices will remain strong for at least the next three years, as demand from emerging countries continues and surging oil and gas prices cause some to turn to coal as a cheaper alternative. Based on various data sources, the company believes that a combination of reduced domestic coal production, higher net electrical generation by coal-burning utilities, reduced coal imports from South America and a surge in both met and thermal exports to Europe has led to a 40-45 million ton swing in the balance of coal supply and demand compared with last year, through mid-October. Supply growth is also expected to remain tight during the next several years, which will likely further boost prices. The market for met coal is widely expected to be robust in the near-term as well, as the industrial boom in countries including China and India drives demand. The company expects to price its coal in 2008 at around $48.
•Favorable Dry Bulk Shipping Market Fundamentals: The extent of the expected overseas coal boom can be gauged by the demand for dry bulk ships, which transport coal and other commodities such as iron ore and grain. As growth in emerging markets such as China and India accelerates, so does the demand for raw materials, which in turn drives up shipping rates. As dry bulk rates climb even higher, it becomes more vital for regions such as Europe and Brazil to import coal from closer to home, which gives U.S. companies the edge over traditional powerhouses such as Australia.
Valuation Based off of a valuation of the company’s reserves, I arrived at a target price of $38.00, using a conservative value of $27.00 as the mid-cycle price for metallurgical coal. I arrived at a price of $28.22 in my DCF base case, $18.00 in my DCF worst cast, and $29.00 in my DCF best case. Based on a comparable multiples analysis, I arrived at a price target of $36 in my base case scenario, $31 in my worst case scenario, and $38.00 in my best case scenario, arriving at an average price target based on comparable multiples of $35.00. Taking the average of these three valuation methods gives us a price target of $33.00.
Risks •Slow down in global industrial boom- A slowdown in the global industrial boom would send petroleum prices downward, thereby making coal less attractive, which would result in a decline in demand for coal. •Drop in dry bulk shipping rates- A drop in dry bulk shipping rates would hurt Alpha Natural Resources because buyers would no longer view American coal as a cheaper alternative to other regions, a key element to my investment thesis. •Over supply of coal- As coal prices continue to increase, the attractiveness to mine for coal increases for new entrants and incumbents. As a result, an excess supply of coal could come online, eroding ANR’s margins. If substantial supply ever comes online in China, which has a significant amount of coal reserves but lack of infrastructure to extract its reserves, the price of coal will likely drop. •Environmental regulation- Coal contributes to global warming and is seen as an unclean source of energy. Any passing of carbon legislation would likely decrease demand for coal.
In June 2009 it joined forces with Foundation Coal in a $2 billion merger that created the third biggest US coal producer. Foundation Coal had about $2 billion in revenue that year approximately the same as Alpha.
In January 2011 Massey Energy agreed to a $7.1 billion takeover by Alpha. The acquisition (also called a merger since 46% of the new company will be owned by Massey shareholders) will benefit both Massey and Alpha beyond just the shear size of the company (Massey's reputation was hit hard recently after federal regulators blamed it for a fatal explosion on April 10, 2010, meanwhile Alpha has experienced positive publicity with its land reclamation projects being featured on the discovery channel (January 2011).
Proven coal reserves total 897 billion tonnes (mostly in the USA, Russia, China and India, lead by North America), that's enough to support current production rates for over 119 years. Natural gas on the other hand (the second most important fuel for electricity generation) only has 46 to 63 years worth of proven reserves. That could make coal a better long term answer to high commodity prices and demand (the natural gas to coal price ratio has gone from over 3 to about 1 in just five years (2005-2010). Coal is used to generate 70% of electricity in India and over 80% in China making it a highly sought after mineral both in the short and long term.
Coal is among the cheapest sources of energy production; Per kWh coal costs approximately 4 cents, that compares to 9 cents for natural gas and 23 cents for renewables (including wind power). Because of that there is a growing interest in building power plants in China (one major one built each week) however policies in the United States are shifting the focus over to renewables which are both environmentally friendly and more expensive (as of 2010 the shift was subtle (the United States exported 25% more coal or 100 million tons in 2010 than it did the year before, in 2011 coal exports are expected to continue to be high making up for unstable production out of Australia).