Why lower cash costs didn’t help Walter Energy make money

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Aug. 12 2014, Updated 1:00 p.m. ET

Lower cash costs didn’t help Walter Energy

Walter Energy (WLT) generated revenues of $378 million for 2Q14 compared to $441 million in 2Q13. The company sold 2.7 million tons of metallurgical coal and 222 thousand tons of thermal coal during 2Q14.

U.S. operations accounted for two million tons and 196 thousand tons of metallurgical coal and thermal coal sales, respectively. Canadian and UK operations sold 669 tons of metallurgical coal and 26 thousand tons of thermal coal during the period. The U.S. operations generated 299 million in sales while Canadian and UK operations generated 79 million in sales.

Sales realization

The realization per ton for the thermal coal was up at $81 in 2Q14 from $70 in 2Q13 and $64 in 1Q14. However, realization for met coal from which the company generates almost all of its revenues was down substantially to $114 in 2Q14 from $150 in 2Q13 and $127 in 1Q14.

Operating costs

Drop in realization was partially offset by lower cash costs per ton. The cash costs per ton for metallurgical coal were down to $73 a ton for 2Q14 from $78 in 2Q13, but up from $69 in 1Q14. The primary driver behind the lower cost was idling of high-cost Canadian operations during the quarter.

The company recorded mine idling costs of $4.5 million during the quarter. In addition to mine idling costs, the company recorded expense of $6.4 million towards take-or-pay charges paid to Canadian ports due to lower shipments than contracted volume. Both these expenses are recurring in nature.

EBITDA

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Since the drop in realization is more severe than drop in costs, the operating profitability of the company has gone for a loss. The company reported adjusted earnings before interest, taxes, depreciation, and amortization (or EBITDA) of $11.6 million—3% of sales—in 2Q14 from $36.7 million—8.3% of sales—in 2Q13.

Other major metallurgical coal producers (KOL) have also idled mines in the current difficult environment. Arch Coal (ACI) announced idling of its Cumberland River Complex mine in July while Alpha Natural Resources (ANR) has idled some of its Appalachia mines. Peabody Energy (BTU) has recently announced production cut-backs for its Australian met coal mines.

To learn how Walter Energy’s strategy is different its peers, continue reading the next section in this series.

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