Alpha Natural Resources, Inc. (ANR), Walter Energy, Inc. (WLT): 2 Coal Stocks to Avoid

The U.S. coal industry has suffered greatly due to weak coal demand. The Market Vectors Coal , which replicates the performance of coal industry, has an expense ratio of 0.59%. CONSOL Energy Inc. (NYSE:CNX) and Peabody Energy Corporation (NYSE:BTU), with 7.56% and 6.13%, respectively, are among the largest components of Market Vectors Coal. Market Vectors Coal has underperformed the broad market in recent times. Year to date, Market Vectors Coal is down 28%. The following table shows the performance of some component companies of Market Vectors Coal.

Source: Google Finance

Met coal stocks are getting squeezed lately on global economic growth concerns, hence volatility prevails. In contrast, the thermal coal business provides high level of visibility as it is priced and contracted for 2013. Therefore, I believe coal companies that are primarily exposed to the met coal business will underperform coal companies which are mainly engaged in thermal coal.

Despite the ongoing weak market conditions for coal, the coal industry is expected to rebound in the long-term as natural gas prices recover and demand for met coal for steel production increases. Improved coal supply management should also bode well for the industry. Therefore, Market Vectors Coal provides investors a good investment option for the long run.

Met coal stocks getting squeezed

Met coal prices, which are thought of as important driver for the coal companies’ stock price, are expected to remain flat moving into 2H 2013. Weak met coal prices are likely to prevail due to lower coal imports by China, as its domestic production has surged, increased met coal supply by Australian producers, and weak met coal demand by steel producers due to the economic slowdown.

I expect met coal prices to remain depressed or even fall further going forward, therefore, I remain bearish on Alpha Natural Resources. Alpha Natural Resources, Inc. (NYSE:ANR) is likely to underperform its peers due to low thermal coal exposure and weak met coal prices to which it is mainly sensitive to. It is expected that Alpha Natural’s met coal operations will generate almost 50% and 65% of the company’s total EBITDA in 2013 and 2014, respectively. Significant met coal exposure will not bode well for the company, as met coal prices have fallen from $172/MT benchmark price for 2Q 2013 to $145/MT benchmark price for Q3 2013.

More than 25% of Alpha Natural Resources, Inc. (NYSE:ANR)’s met coal volume for 2013 still needs to be priced for the year, which poses a risk as met coal prices are falling. It is also likely that the company continues to price some portion of its volumes below cost as was the case in 1Q 2013, where it priced 25% of its volumes below cost. If below cost pricing continues to happen, this will adversely affect the bottom line and the financial health of Alpha Natural Resources, Inc. (NYSE:ANR).