Analyst: Alpha Natural Resources strategy depends on economy - Business, Government Legal News from throughout WV

Analyst: Alpha Natural Resources strategy depends on economy

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Alpha Natural Resources' sudden idling Sept. 18 of eight coal mines, including four in West Virginia, launched an aggressive corporate restructuring that reflects ongoing changes in the industry.

"It definitely is a snapshot of the larger structural shift," said Jim Thompson, publisher of Coal and Energy Price Report. "Because of the number of operations and the number of people, this really stands out, but in a sense it's nothing new."

Bristol, Va.-based Alpha idled its Alloy deep and surface mines in Fayette County and its Premium highwall and White Flame surface mines in Mingo County in West Virginia, along with three mines in Virginia and one in Pennsylvania.

About 400 positions were eliminated in total, with the number eliminated in West Virginia not immediately known.

On announcing the mine idlings, Alpha laid out some details for a larger restructuring to take place through early 2013 that will eliminate about 1,200 of the company's 13,100 jobs nationwide and will shift the company's focus toward its metallurgical and more cost-competitive thermal assets.

The persistent economic, geologic and regulatory challenges to coal have been felt keenly in West Virginia.

This was the fourth round of Alpha layoffs in the state this year, with the first three cutting about 700 jobs, said spokeswoman Samantha Davison.

Altogether, the state lost about 1,400 coal mining jobs in the first half of the year, almost 6 percent of the total, according to U.S. Mine Safety and Health Administration data, with hundreds more layoffs announced in the two and a half months since.

The industry's challenges are reflected in Alpha's restructuring plan, which addresses thermal coal, burned for electricity, and metallurgical coal, used to make steel, separately.

Thermal coal: challenged

Alpha is cutting extraction at higher-cost thermal coal mines to focus on operations that have a "cost, customer or transportation advantage."

This is a response mainly to two factors affecting coal-burning utilities, Thompson said.

"One is obviously the lower natural gas price atmosphere, because of horizontal drilling and all the abundance of gas that has been discovered and is being produced," he said.

"And there's also the new environmental regulations, which place additional environmental cost on mining and in some cases additional cost or even an inability of electric utilities to burn coal," he said.

Alpha wrote in its media release on the restructuring that "operations that have competitive cost positions and more stable customer demand – such as supplying baseload power plants and generating units that will survive a stricter regulatory regime – will supply the majority of the company's U.S. thermal coal output."

Reserve depletion is a continuing challenge in to thermal coal in Central Appalachia.

"These reserves have been mined for a very long time and a lot of the most economic coal has been taken," Thompson said. "For thermal usage it's arguably as good as any coal in the world, but at least at this moment there's a very limited market that satisfies the cost of mining the coal."

Metallurgical coal: hopeful

While the U.S. and European economies are continuingly sluggish, Alpha said it sees the development of new steel mills globally that will want the company's high quality metallurgical coal.

This is not necessarily a near-term opportunity.

"The long term looks very positive for increased global steel demand and new blast furnace builds," said Jim Truman, Principal Analyst for Metallurgical Coal Demand at Wood Mackenzie. But "The price right now is at a low point, for the last couple years, and it will take a while."

Thompson characterized a focus on metallurgical coal as a "medium-term" prospect, but added that it's a natural move for Alpha.

"Alpha has the most metallurgical coal of any company in the United States," he said.

"You do have high costs in Central Appalachia; there's no way to get around that," he said. "But the coal that is extremely profitable even when costs are high, in a normalized economic environment, is metallurgical coal. It makes sense for them to turn their efforts to that."

Metallurgical coal accounted for only about 18 percent of Alpha's production in 2011, according to the company's annual report.

The economy

In a third part of its restructuring, Alpha is streamlining its corporate structure to cut overhead.

"The focus and shape of our company need to change to reflect our new business environment," said Alpha President Paul Vining in the media release. "We must have a nimble operating model, superior cost management and an overhead structure that matches our streamlined operational footprint."

All told, through early 2013, the company expects to reduce annual costs by about $150 million a year and annual production by about 16 million tons from 2011 production of 106 million tons — about half of the reduction coming Wyoming's Powder River Basin and most of the rest in high-cost thermal operations.

How one views Alpha's move depends largely on one's view of the economic futures of the U.S. and the world, Thompson said.

"If you believe that the economy will rebound relatively soon, then you would have a positive outlook for metallurgical coal demand and prices. If you believe that we are in for a very long-term economic malaise, then you wouldn't be as optimistic," he said. "It really is as simple as that."

The market appears to see recovery further out. Alpha shares opened before the Sept. 18 announcement, at $7.95 and closed the day about flat at $7.88; trading on Sept. 19 trended down toward $7.60.

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