Walter Energy, Inc. (WLT) Is Worth How Much?

A typical headline such as the above usually signals a stock that has an absurdly high valuation and that is due for a correction. In the case of Walter Energy, Inc. (NYSE:WLT), the amazing part is how low the market cap has dropped. This stock was a poster child of the commodity boom and has collapsed around 90% in just over two years.

The company is seen as the “pure play” on metallurgical coal used in the making of steel. It benefited greatly from the surging demand in China that has peaked in the last year, sending met coal prices lower and the company into disarray due to liquidity fears.

The question is whether the stock has any value now that it is only worth $850 million after having a market cap closer to $9 billion when the decade was just starting. Typical of the stock market, it likely overshot on the upside and is now overshooting to the downside.

Shocking collapse

The stock peaked around $140 back in April of 2011 and collapsed on the way to of $9.88 in June of this year. In a time period of two years, the stock lost 93% of its value.

Stock Chart – 3 Year

The collapse, while spectacular, was such an industry-wide phenomenon that Cliffs Natural Resources Inc (NYSE:CLF) and Alpha Natural Resources, Inc. (NYSE:ANR) both saw similar declines. As with Walter Energy, Inc. (NYSE:WLT), both stocks supply commodities for the steel industry with Cliffs Natural Resources Inc (NYSE:CLF) focused on iron ore and Alpha Natural Resources, Inc. (NYSE:ANR) on met coal as well. The below 10-year chart shows the potential returns if the segment was to come roaring back on emerging market demand.

WLT data by YCharts

Slashing dividend and refinancing

According to a Bloomberg report, Walter Energy, Inc. (NYSE:WLT) is negotiating an amendment to a debt financing that will likely result in the cutting of the dividend and potentially increase interest rates. Considering the financial situation that the company finds itself in, a dividend cut would actually appear prudent. Apparently the company is close to exceeding the leverage requirements for its senior secured debt, which could be disastrous if it was unable to alter terms. Though more concerning might be a increase in the interest rates on top of an already $40 million in quarterly interest cash costs.

Encouraging signs

While some of the year-over-year numbers are still depressing, the company is making great progress in reducing costs while maintaining strong production. In fact, the company forecasted a 5% reduction in costs of production and sales during Q2 with a significant improvement to earnings, adjusted EBITDA, and cash flows.