Controlling costs in a tough coal market
As a whole, Alpha Natural Resources Inc.’s (ANR) ability to survive weak coal market conditions will depend on management’s ability to control costs and ensure it has a steady flow of revenue through its operations. This also applies to other coal companies in the Market Vectors Coal ETF (KOL), like Arch Coal (ACI), Peabody Energy (BTU), and Consol Energy (CNX).
Alpha’s management team expects to see a reduction of SG&A expenses in 2014 to a range of $110 million to $140 million compared to $159 million in 2013. Also, the company intends to reduce its cost to mine in the eastern coal segment by 7% in 2014. So far, the company has not exactly been very effective in controlling the costs. Even though the company beat recent analysts’ expectations in its recent 4Q financial result, the management team still has a lot of work to do to make Alpha profitable.
In 2014, Alpha (ANR) expects to ship a total of 77 million to 90 million tons of coal compared to 86.9 million tons in 2013. Management expects decreasing coal supply growth on their end due to a drastic reduction of capital spending on new mines since 2012. Plus, few mines are scheduled to come online in the coming years, which limits the growth of coal supply on Alpha’s end.
Fines and capital expenditures
Alpha’s management team expects a slight rise in capital spending in 2014 to $275 million from $258 million in 2013. This includes part of the $160 million planned capital expenditures for upgrading existing and installing new equipment for waste water treatment as part of the deal it struck with the EPA (Environmental Protection Agency) to reduce its discharge of iron, manganese, aluminum, salinity, and selenium from a total of 79 active coal mines and 25 coal processing plants in the Appalachian region.
Alpha was also ordered to pay a $27.5 million fine for over 6,000 violations in state issued discharge limits. Note that more than half of the violations came from one of their acquired companies in 2011, Massey Energy. These fines aren’t unfamiliar to Massey, as it was fined $20 million in 2008 for similar violations of water pollution laws.
While the management team has been making efforts to cut costs in its coal operations with respect to idling less profitable mines, it must also take extra precaution with these fines, as they’ll have a significant impact on the company’s 2014 financial performance. Coupled with the weaker coal prices that are expected, Alpha will face a very challenging year ahead despite the cost cutting measures taken by the company’s management team.