Monday, May 5, 2008

Alpha Natural Resources (ANR) Booming Earnings - Just the Start

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As I keep saying, metallurgical coal is about where fertilizer was 15 months ago - we have a long wave of earnings estimates upwards coming in the year+ ahead, with the biggest pushes up in earnings coming in about a year. Alpha Natural Resources (ANR) is up about 7% premarket as I check off a fabulous earnings report.... just getting started in a long and winding road up over the next year I believe. I wrote a piece on fertilizer in October 2007 about just how wrong these analysts (who are supposed to be industry experts and just follow one sector) were... when a no name like me could see the coming earnings explosion [Oct 23: Analysts Still Doubting the Fertilizer Stocks] - since then estimates for many of these companies have gone up 2-3x in the out years. Replace the word fertilizer with metallurgical coal and check back in 15 months; once again analysts are so... so... so... wrong. And this creates opportunities for us, before CNBC jumps on the bandwagon next Valentine's Day proclaiming the bubble that is coal.

Remember, I switched to this name about a month ago due to it's unhedged metallurgical production [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In] but just about every coal company does have metallurgical coal exposure, it's just a matter of degree (and thermal coal ain't too shabby either). While the rest of the world obsesses with the fate of Yahoo (YHOO) [editor note: what were they thinking?] the rest of the world (once again) moves on.
  • Alpha Natural Resources, Inc. (NYSE: ANR - News), a leading supplier of high-quality Appalachian coal, reported a 17 percent improvement in revenues from coal sales in the first quarter of 2008 over the first quarter of 2007 as the company achieved the highest quarterly price realization in its history due to rising metallurgical coal exports and price levels.
  • For the three months ended March 31, 2008, Alpha recorded coal sales revenues of $445.7 million compared with $380.2 million in the same period of 2007. Net income for the most recent quarter was $25.5 million ($0.39 per diluted share), compared with net income of $8.3 million ($0.13 per diluted share) in the first quarter of 2007. (Analysts expected $0.17)
  • Global supplies of hard coking coals for making steel have tightened considerably due to production and logistics issues in Eastern Europe and Australia. With world steel output climbing an estimated 5 percent in the first two months of the year, prices for metallurgical coal have risen quickly as has international demand. Alpha, the largest exporter of metallurgical coal out of the U.S., experienced a surge of 430,000 tons in its first-quarter exports, year-over-year, which boosted metallurgical coal sales to 42 percent of the company's total sales volumes for the quarter.
  • "Coal has joined the energy commodity boom and tight supplies are having a meaningful impact on prices, for both prompt deliveries and forward commitments," said Michael Quillen, Chairman and CEO.
  • Quillen said that after the close of the first quarter, the company secured commitments for 2008 delivery on three-quarters of a million tons of planned metallurgical production, at price levels consistent with recently announced settlements with Japanese steelmakers. "Those prices ranged from $295 to $305 per metric tonne at the port, which correlates to a realized price for Alpha of approximately $240-250 per short ton at the mine," Quillen said.
  • "In addition to improving our price deck for the current year, we've now established a firm benchmark on price discussions for our 2009 metallurgical sales, where we still had considerable planned production -- more than 10 million tons -- left to commit and price as of mid-April," added Kevin Crutchfield, Alpha's president. "We're convinced that supply and demand conditions in both the domestic and international steel markets will underpin a strong price environment going forward."
When you read these numbers, again keep in mind they are selling met coal at $85 this quarter... we are talking $200s (potentially breaching $300) into 2009.

Outlook
  • Coal supply continues to tighten around the world. While traditional coal exporting nations such as Australia, Poland, Indonesia and South Africa have been subject to supply disruptions or voluntary cutbacks, U.S. exports of both thermal and metallurgical coal have shown sustained strength, up 30 percent on a combined basis in the first two months of 2008 after last year's 19 percent gain.
  • Rising natural gas prices and the U.S. dollar's weakness are adding fuel to thermal coal demand both domestically and overseas, while high steel prices have mills searching the world for reliable supplies of metallurgical coal. U.S. steel mills, in particular, finished 2007 with coking coal inventories 34 percent lower than in 2006, at a time when production is needed to restock service center inventories and take advantage of record high steel prices.
  • On the thermal side, the company contracted substantially all of its remaining uncommitted but planned 2008 production (approximately 340,000 tons) at an average realization of approximately $87 per ton. Commitments were reached on approximately five million tons of planned thermal production for 2009, at an average realization of approximately $79 per ton.
  • Altogether, as of mid-April, Alpha had more than 37 million tons of planned coal production uncommitted and unpriced for 2009 and 2010, including more than 21 million tons of metallurgical coal and 16 million tons of thermal coal. In total, 57 percent of 2009 planned production was uncommitted and unpriced as of April 15, while 87 percent of planned 2010 production was uncommitted and unpriced.
If you want to see a company who is confidant in their long run, and desperate to retain workers in the coming boom, read about the retention packages that came out late last week. (and these guys deserve everything they get, talk about one of the most dangerous, hardest jobs on Earth)
  • Alpha Natural Resources, Inc. (NYSE: ANR - News), the nation's leading supplier of metallurgical coal, introduced an unprecedented, multi-year package of rewards and incentives Thursday to the company's more than 3,600 employees.
  • The package was presented at Alpha's 58 mining sites in four states. Employees were given ownership in the company in the form of a grant of 25 shares of company stock. Employees were also informed they no longer have to contribute to health, dental and vision insurance premiums. Additional incentives include semi-annual bonuses for operating personnel based on continued service to the company, and rewards for mine rescuers and trainers, including cash payments for participating on the all-volunteer teams and vacation money to use in their time off with families.
  • Alpha also unveiled an energy relief/fuel assistance program to help employees cope with higher commuting expenses due to high gas prices.
  • Costing more than $13 million in the first year alone, the package is worth more than $3 per hour to the average employee.
This is what you can do when you see years of boom ahead; sort of sounds like General Motors (GM) circa 1950s.

[Dec 6: Coal Stocks Quietly in a Bull Market]

Long Alpha Natural Resources in fund and personal account

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