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Which American Coal Producer Could Be the Next Patriot Coal?

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Walter Energy

Met (metallurgical) coal producers (KOL) are the worst hit in the current environment. Based on our analysis so far, we can conclude that mainly met-coal-producing Walter Energy (WLT) is running a high risk of bankruptcy.

High leverage and sustained cash burning have dragged Walter Energy into default. The company failed to make an interest payment due on April 15 this year. While the company committed to make the payment by May 15, it also talked about the possibility of Chapter 11 bankruptcy. The company has over $400 million in liquidity. So the fact that it asked for a grace period to make $62.4 million in interest payments says everything that needs to be said about the liquidity issues at this company.

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Alpha Natural Resources and Arch Coal

Alpha Natural Resources (ANR) and Arch Coal (ACI) aren’t much less risky with their high leverage and cash burning operations. That said, these companies are better off than Walter Energy because of a diversified product mix that includes low-cost Powder River Basin coal. What’s more, these companies have better liquidity and access to capital markets.

Peabody Energy and Cloud Peak Energy

Peabody Energy (BTU) also produces met coal. The company’s advantage is that its met coal mines are located in Australia. If the met coal market picks up because of Asian demand, Peabody Energy will be the first to benefit. Peabody Energy also benefits from a large presence in the Powder River Basin. The company has substantial debt, but it’s spread across a number of years, with a large maturity of $1.5 billion in 2018. The company can also resort to selling non-core assets in case of a liquidity crisis.

Cloud Peak Energy (CLD) is the safest bet. The company doesn’t have much debt on its balance sheet, and its available liquidity is sufficient to take care of what debt it has. Plus, the company is generating free cash flow. Nevertheless, Cloud Peak Energy faces concentration risk because all of its mines are located in the Powder River Basin.

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