Boston, MA 04/28/2014 (wallstreetpr) – The Coal industry and Alpha Natural Resources, Inc. (NYSE:ANR) continues to witness challenges with decreasing coal prices and oversupply. The Company has burned more cash compared to previous years that create an alarming state for the U.S. second largest coal producer.
Factors affecting liquidity pressure
Factor 1: Increasing industry pressure
Since 2011, coal price fell by 66% and continues to plunge more due to oversupply of coal to the market as a result of decreasing demand from China. The market seems to get worse rather than to recover as companies like James River Coal Co. and Patriot Coal Corp. are unable to sustain their operations and filed bankruptcy.
Factor 2: Expensive deal
Despite growing pressure over coal prices, Alpha was trading at $67.38 in January 2011 and went through Massey deal for $7.1 billion in the same month. The deal valued at 25.2x of Alpha’s EBITDA, more than any takeover in the coal space.
The takeover has a negative impact over Alpha Natural Resources, Inc. (NYSE:ANR)’s performance as the Company’s shares fell by 94% since the deal. Now the stock is trading at all time low of $4.20. Investors are also expecting that the stock will continue to fall with increasing competition and limited scope to grow in the oversupplied market.
Factor 3: Profitability pressure with high cash burn
In last three years, Alpha Natural Resources, Inc. (NYSE:ANR) reported loss and expects to continue the trend as per analysts’ estimates. Analysts expect that Alpha’s cash burn will double and likely to be $216.8 million by 2014 end and continue to lose more with increasing pressure over sustainability in coming years.
Factor 4: High leverage and rating downgrade
As of December 31, 2013, Alpha has $3.4 billion debt and debt to EBITDA ratio of 37.9x, high among the U.S. coal producers.
The company’s bonds also have lost 9.09% in 2014 and investors now expects 9.67 percentage points more compared to Treasuries to hold its $800 million of notes due in June 2019. In addition, Standard & Poor’s lowered its rating from B+ to B and Moody’s reduced its grade to B2 as there is no material improvement in Alpha with increasing pricing pressure of coal.
Considering the balance sheet position, Alpha can manage; however, increasing profitability pressure and high cash burn will further erode its liquidity.