New York-listed Walter describes itself as the world’s leading pure play metallurgical coal producer for the global steel industry, but also produces natural gas, steam coal, industrial coal, anthracite, metallurgical coke and CSG.
For Walter, its stretched balance sheet and the met coal market collapse and weak forecast continue to remain major headwinds which the company is struggling to overcome.
High production has created a glut in the market and has kept prices low, and the analyst, who remained anonymous, said the company’s depressed valuations were justified due to the market collapse.
This bleak met coal market outlook is due to weak market fundamentals, as slowing Chinese met coal consumption and high met coal supply have been negatively affecting it.
“In recent years, met coal demand has been slowing down while supply has been strong, which has created a glut in the met coal market and has kept prices weak,” the analyst said.
“Going forward, I do not foresee any noticeable improvement in met coal prices, therefore, the performance of US met coal miners like Walter Energy and Alpha Natural Resources is expected to remain challenging.”
Miners are battling away under these strong headwinds, with US coal miners working particularly hard to support their earnings and working to improve cash flows and strengthen the credit outlook through productivity improvements and credit amendments, as their balance sheets are stretched.
Yet the analyst said that despite the prudent efforts to improve performances, US coal miners would continue to “burn cash” in upcoming quarters.
Walter Energy is among the leading met coal companies in the US, but its stock price has dropped by more than 99% since 2011.
“Due to the met coal market collapse and highly leveraged balance sheet, the company has a significantly high debt to equity ratio,” the analyst said.
The collapse of the met coal market has also seen the company's margins drop, and its cash flow and earnings outlook seem depressed, but has been working to improve productivity, cutting its capital expenditures and making credit amendments to enhance credit strength and keep the company functional until a coal market rebound.
Yet the analyst says Walter has been running out of options to keep itself functional due to said coal market collapse.
“The company might announce a sale of some of its assets to boost liquidity, which will only be a short-term positive for the stock,” the analyst said.
“The company has completed only $US25 million ($A32.81 million) of asset sales under its $250 million asset sale target, and is expected to provide an update on its asset sales plans in upcoming quarters.
Chinese met coal imports growth has been slowing since 2012, and its GDP growth is expected to stay weak going forward, which will keep pressure on the met coal market.
China's GDP growth for 2015 is expected to be 7%, which will be the lowest in the last two decades.
The slowing steel production also doesn’t bode well for met coal demand, with global steel production for the first two months of 2015 having dropped by 1.5%.
