Walter Energy, Inc. (WLT): Will This Coal Miner Stop Falling?

Just like Walter Energy, Peabody Energy Corporation (NYSE:BTU) has been focused on costs. The main success came from its Australian unit, which managed to reduce costs by 10% in the previous quarter. Ironically, Australian production is one of the sources of excess supply on the market, which hurts coal miners.

Arch Coal Inc (NYSE:ACI) and Alpha Natural Resources, Inc. (NYSE:ANR) are expected to post a loss in the next two years. The stocks are trading at cheap prices based on their P/B ratios. Arch Coal trades at 0.3 P/B while Alpha Natural Resources, Inc. (NYSE:ANR) trades at 0.2 P/B. The fate of the stocks is in the hands of coal prices too. Without the improvement on the pricing front, these stocks would perform badly.

Arch Coal Inc (NYSE:ACI) is focused on the thermal coal market. Thermal coal is losing its ground in generation. Its share accounts for 40% of total generation, while it was 50% just five years ago. Given this fact, Alpha Natural Resources has switched its strategy toward met coal. This is an interesting strategy in the long term. But in the short term it presents additional risks, as met coal prices are under more pressure than thermal coal prices.

Bottom line

Walter Energy, Inc. (NYSE:WLT) could not find support, and its stock continues to fall. The company depends on the price of met coal. Internal improvements can diminish the impact of low prices, but cannot solve the problem. Walter Energy pays a dividend that yields 3.3%, but the stock is too dangerous to consider buying it for the dividend. The stock is volatile and I expect it to stay volatile in the near term.

There are two ways that met coal prices could rise. Either the macroeconomic situation improves and demand picks up, or players begin to exit the business and supply shrinks. The latter looks to me more plausible. If Walter Energy survives this hard time, it would be an attractive company with good costs and a splendid asset base. But for now, it’s just too risky to invest in.

The article Will This Coal Miner Stop Falling? originally appeared on Fool.com and is written by Vladimir Zernov.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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