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Is it too late for Walter Energy to start idling mines?

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Dec. 4 2020, Updated 10:43 a.m. ET

Production cuts and idling mines

Alpha Natural Resources (ANR) has idled 35 million tons of production in the past three years while Arch Coal (ACI) has implemented production cuts and idled its high cost Cumberland River Complex mine recently to mine less coal to ease the oversupply. Peabody Energy (BTU) has recently announced production cuts in its Australian mines. Both these decisions seem to be “active” because they’re targeted towards reducing the supply in the market.

Too late to idle mines

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However, Walter Energy (WLT) made the decision to idle its Canadian operations too late. It was hoping for revival in the metallurgical coal demand and prices. The company’s Canadian and UK operations failed to breakeven even in 2Q13 when the cash costs exceeded the net selling price by over $20 a ton. However, the company kept producing coal from Canadian mines into an already oversupplied market. The company finally decided to idle the Wolverine and Willow Creek mines in Canada in April, 2014, while the Brule mine ceased operations effective June 1.

The punishment

As the company kept running losses quarter on quarter due to unsustainably low met coal (KOL) prices, the financial position weakened. The company refinanced its debt by notes at a higher rate to remain solvent. For 2Q14, the company’s interest expenses went up to $73 million from $53 million in 2Q13 as the company refinanced its debt at a higher rate at the end of 1Q13. The interest payout is scheduled in the second and forth quarter with just $18 million interest expenses in 3Q14. The company also recorded restructuring and asset impairment changes of $31.3 million in 2Q14 towards impairment of Blue Creek terminal assets in Canada as well as restructuring charges towards idling mines.

The bottom line

The lower operating profit coupled with higher interest expenses and impairment charges resulted in expansion of net losses to $151 million in 2Q14—$2.33 per share—from $34 million—$0.55 per share—in 2Q13.

Cash burn continues

The company burnt $39 million in operating activities in 2Q14 compared to $24 million in 2Q13. The free cash flows continued to remain negative at $82 million for the quarter taking into account the $43 million capital expenditure.

To learn more about the financial position of the company, continue reading the next part of the series.

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