Alpha Natural Resources Sells Assets, Still Faces Big Problems

It’s that kind of year for coal miners, the kind where investors wonder what will be left in their stocking this Christmas, a better 2014 or another lump of, well, coal.

REUTERS

Alpha Natural Resources (ANR) has dropped 23% in 2013, while Arch Coal (ACI) has fallen 39% and Peabody Energy (BTU) is off 28%. Only Consol Energy (CNX) among the larger miners is up this year, having gained a stock-market lagging 15% after saying it would look for ways to reduce its exposure to the business.

But Alpha Natural Resources is doing its best to turn it around. Today the coal miner said it would sell its stake in a joint venture for $300 million in cash and stock, adding a needed cash infusion.

Sterne Agee’s Michael S. Dudas and Satyadeep Jain believe that management has “[unlocked] substantial value for its gas assets.” They write:

Alpha is monetizing its 50% interest in Marcellus Shale Gas JV with Rice Energy for $300M ($200M in Rice Energy IPO and $100M in cash). Transaction metrics indicate valuation is significantly above our estimates and previous Marcellus Shale transaction comps. We would add to or introduce positions at current levels for risk-tolerant investors…

The transaction would add $100M of cash to Alpha’s balance sheet, thereby strengthening overall liquidity balance of $2.0B. Alpha would also retain upside on growth opportunities presented by the combined Rice Energy platform. Alpha would also get a board seat on Rice Energy. Note that even after exchanging its 7,500 acres interest in JV, Alpha has another 10,000 acres of Marcellus gas assets in its portfolio; we expect management to continue to explore opportunities to create
substantial value for these remaining Marcellus assets.

Citigroup’s Brian Yu doesn’t believe the transaction is a game changer. He writes:

ANR announced an agreement to exchange its 50% interest in the Alpha Shale Resources JV with Rice Energy for $100 mln in cash and $200 mln of Rice Energy's common stock in their anticipated IPO. This transaction is contingent on the closing of the IPO…

With spot metallurgical coal prices continuing to drop ($133/tonne vs. 4Q13 settlement of $152/tonne) and contracts likely headed for a QoQ decline for 1Q14, we view any move to improve cash flows as an incremental positive and the implied value appears consistent with our work. However, $200 mln of the transaction value is in the form of Rice Energy shares and we are unsure if the $200 mln is a fixed value or a derived value based on a fixed share and price assumption. Relative to ANR's current EV of ~$3.9 bln, the transaction is material but does not alter our view. Strong earnings headwinds remain in 2014 vs. 2013 since the company will not benefit from higher priced met coal contracts like they did at the end of 2012 (9.6 mln tons @ $106.13/ton FOB mine). We expect the company's realized met price to average $89.27/ton for 2014, implying significant downward revision to the consensus EBITDA estimate of $428 mln vs. Citi at $297 mln, maintaining Sell.

Shares of Alpha Natural Resources have gained 13% today to $7.43, while Arch Coal has risen 6.8% to $4.55, Peabody has advanced 2.4% to $19.08 and Consol is up 1.4% to $37.11.