How did Walter Energy lose 89% of its value in less than a year?



The biggest loser

Walter Energy (WLT) has been the worst performing stock of 2014. The company lost a whopping 89% since the beginning of 2014 and closed at $1.78 on December 4, down from $16.63 at the start of the year. A multitude of factors has caused the fall, including persistently low met coal prices in spite of announced production cuts and a slowing China. The high leverage, as discussed in the previous part, has also been a critical factor behind poor performance of stock, especially as the company faces high interest burden in a low price environment.

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A slowing China

Met coal exporters around the world in the VanEck Vectors-Coal exchange-traded fund (or ETF) (KOL), including Alpha Natural Resources (ANR), Peabody Energy (BTU), and Rio Tinto (RIO), are also anxious about a slowing China. China’s economy grew at 7.3% in the third quarter of 2014, the slowest pace in five years. China’s steel production is expected to peak by 2017–2018, which poses challenges to met coal exporters. China’s purchasing managers index (or PMI) came in at 50.3 in November, down from 50.8 in October, indicating lower expected future growth.

Production cuts

So far, around 20–25 million tons of met coal production cuts are announced globally. In spite of that, the benchmark met coal prices have dropped to $119, a six-year low. While a part of these productions are yet to go into effect, a significant upward movement in met coal prices is not in sight. At current prices, Walter Energy and a lot of other producers are burning cash. If prices remain subdued, these companies will see available liquidity dwindling.

While Walter Energy’s stock has been on a downtrend since the start of the year, a Republican victory and a positive outlook on domestic steel production took the stock up in November. Let’s discuss that in the next part.


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