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Alpha Natural Resources: Needs A 20%+ Increase In Metallurgical Coal By 2017

Alpha Natural Resources reduced its net debt by $262 million by repurchasing debt with a combination of new secured debt and cash.
    The transaction helps Alpha's cash position for December 2017 and after due to the decrease in the debt maturing at that time and in 2018 and 2019.
    Alpha is still dependent on an increase in metallurgical coal prices. Its cash and marketable securities position is likely to fall to around $650 million by the end of 2015.
    2016 cash burn is estimated at $330 million at current prices, although a $10 increase in the benchmark for metallurgical coal should translate into a $100 million decrease in burn.
    Alpha's survival likely requires an increase in met coal prices to a benchmark of at least $130 by 2017, when its credit facility expires and $263 million in notes matures.

Alpha Natural Resources (NYSE:ANR) repurchased $593 million of its debt at the beginning of April with a combination of new debt and cash. This reduces Alpha's net debt by $262 million.

From looking at its expected cash flow and maturities in the next few years, I'd estimate that benchmark metallurgical coal prices in the $130 to $140 range by 2017 would be needed to give it the ability to deal with its 2017/2018 debt. Alpha would still likely have modest cash burn at that price, but the outlook would probably be decent enough to achieve refinancing and the extension of its credit facility.
Impact Of The Transaction

The transaction is positive for Alpha Natural Resources' long-term situation since it reduces net debt by $262 million. However, it doesn't do much to change Alpha's situation in the next two and a half years. The transaction has a negative effect on Alpha's cash position in the short-term since $117 million in cash was used to help repurchase the notes. The annual interest savings is $21 million per year, so the point where the transaction ends up helping Alpha's cash position is in December 2017 when it now has $82 million less of the 2017 Convertible Notes maturing. As well, the reduction in 2018 and 2019 notes means that Alpha's cash position benefits by around $300 million by 2019, as the new financing matures in 2020.
2015 Outlook

One key challenge for Alpha Natural Resources is that a return to positive cash flow is dependent on a recovery in the metallurgical coal market. This recovery appears to be slow in coming as the strong US dollar allows non-US producers to make enough money to keep their metallurgical coal mines operating despite low benchmark prices.

Between the lower interest costs, the lower metallurgical coal prices and the potential increased insurance costs, I am anticipating that Alpha Natural Resources will burn around $30 million more cash from operations than I previously anticipated. Alpha also has $154 million in convertible notes maturing in 2015, and spend $117 million to repurchase its debt, so I estimate that its 2015 year-end cash and marketable securities position would end up at around $650 million now.
2016 and 2017 Outlook

Alpha Natural Resources should have reduced cash burn in 2016 since it would have no debt maturities and no additional $42 million annual bonus bid payments for the Belle Ayr mine. I would estimate that its 2016 cash burn will be around $330 million if benchmark metallurgical coal prices are around $110. Each $10 change in the benchmark price of metallurgical coal could affect Alpha's cash burn by up to $100 million.

2017 appears to be a key year for Alpha Natural Resources since it has $263 million remaining in 2017 Convertible Notes that mature in December 2017. The remaining $618 million of its credit facility commitments expire on September 30, 2017 as well ($276 million expires in 2016).

Alpha Natural Resources should have enough liquidity to get to December 2017 as long as metallurgical coal shows some minor signs of recovery before then. However, to either repay or refinance its 2017 and 2018 debt would likely require a more significant recovery in metallurgical coal (probably a benchmark price in the $130 to $140 range would enable Alpha to refinance).
Conclusion

Alpha Natural Resources made a good move in reducing its net debt by repurchasing notes at a significant discount. Alpha Natural Resources is still at the mercy of the coal markets though (primarily metallurgical coal). If metallurgical coal stays around the $110 to $120 mark over the next few years, Alpha will likely run out of cash by the end of 2017, when its 2017 Convertible Notes mature. The note repurchase has made it slightly easier to deal with its 2017 and 2018 debt maturities though, and a moderate improvement in prices will likely give it the ability to refinance its debt.

Obviously Alpha is still a heavily indebted company that is dependent on factors out of its control (coal prices) to survive. However, I can see a way out of Alpha's predicament if the coal markets cooperate to a reasonable extent.

source: http://seekingalpha.com