Is All the Bad News Out?
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Alpha Natural Resources, (NYSE: ANR), reported 2nd quarter earnings today that missed analyst estimates. The Company announced $2.5 billion of non-cash asset impairments / write-downs, including a write-down of goodwill. The wording of the press release and the tone of the commentary was fairly negative, especially compared to cautiously optimistic remarks made by Arch Coal's (NYSE: ACI) management team 2 weeks ago.
2 Fridays ago, Arch sparked a rally in the coal sector by confirming reports that coal stockpiles were falling, especially in the western states where the company produces most of its coal. Arch also demonstrated good unit cost control despite lower production. The market liked Arch's earnings, considering them less bad than feared with signs of a tentative bottom in coal prices.
Switching back to ANR, if the market believes that Alpha's 2nd quarter earnings indicate a bottom, or that all of the bad news is out, then ANR might rally today like Arch did on its earnings. As a reminder, Arch stock reached an intra-day high of $7.76, up 50%! from its recent low tick. By no means am I suggesting that ANR is in for such a stellar ride. Arch was much more heavily shorted going into earnings than Alpha was.
More specifically on Alpha's earnings, the Company reported that it contracted additional coking coal at a price of $105 per ton. This is a very low price, and probably the most negative part of the earnings press release. Still, full year guidance remained largely intact. The biggest move was in the expected realized price for coking coal, down to $126 per ton from $136. Production guidance was down by 1mm tons to a still wide range of 100-115 million tons.
The cost guidance offered a modest positive surprise. Alpha now estimates costs for the Eastern segment to be $74-$78 per ton, down $1 from previous guidance. Cost control was a key driver of Arch Coal's earnings report and subsequent stock rally. Alpha's commentary on the coking coal market confirmed negative sentiment first discussed by Consol Energy (NYSE: CNX) on its 2nd quarter conference call. Like Alpha, Consol contracted some coking coal at surprisingly low prices. In Consol's case, the coking coal in question was its high margin premium low-vol coking coal.
A key question for the earnings conference call at 10am today is what was the mix of coking coal that Alpha placed at $105 per ton? If it was lower quality coal that the Company just wanted to get rid of, then that's not nearly as bad as if it was Alpha's top quality product.
Although cash flow from operations was negative, Alpha maintains a great deal of liquidity with cash and marketable securities of $500 million and un-drawn debt facilities of $1.1 billion, for total liquidity of $1.6 billion. It will be interesting to learn if Alpha bought back any of its common shares. The Company has a $500 million share buyback program that it hasn't used this year.
MockingJay2011 owns shares of Alpha Natural Resources and CONSOL Energy. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.