Since the majority of Westmoreland Coal’s (WLB) contracts are long-term cost-protected contracts, its margins are protected. Many contracts have high-margin reclamation. The company’s EBITDA[1.earnings before interest, tax, depreciation, and amortization] margins have remained between 10% and 26% during the last six quarters.
This trend contrasts with that followed by other major coal producers (KOL) such as Peabody Energy (BTU), Cloud Peak Energy (CLD), and Arch Coal (ARCH), where pricing is driven by some benchmarks and profitability fluctuates with changes in benchmark prices. However, you should note that Westmoreland Coal has seen net losses for the past three years.
Cash generating operations
WLB has generated positive free cash flow in each of the past ten quarters. According to the company’s latest filing, its free cash flow yield is more than 85%. As discussed earlier, most of its contracts with customers are long-term cost protection contracts. Westmoreland receives a certain percentage over and above the cost of production. Therefore, irrespective of the market price of coal, Westmoreland Coal generates positive cash flow from its operations. The inclusion of a cost recovery clause in contracts is an added advantage for the company.
Whereas Westmoreland’s cost recovery clause protects against downside, the company may not see as much profit as peers if market prices for coal rise sharply. Also, since the majority of WLB’s contracts are long term, with an average life of up to 2022, the company must wait for a continuous uptrend in coal prices.