This Coal Miner Will Remain Under Pressure
Tough times for coal companies just won't seem to end. As a response for this prolonged pressure, coal miners are searching for ways to enhance their financial position. Arch Coal announced a series of financial transactions that aim to improve its financial situation.
Arch Coal is seeking amendments to its credit facility to provide the company with additional flexibility by eliminating certain financial covenants governing that facility. The company also wants to increase the amount of its term loan by $300 million. In addition, Arch Coal is making a cash tender offer for its $600 million 8.750% senior notes due 2016. Will these measures help the troubled coal miner?
Searching for refinancing
Arch Coal has two main problems. The first is the constant pressure on thermal coal prices, and the second is its massive $5.1 billion debt. The first problem prohibits Arch Coal from dealing with the second. So far this year, Arch Coal posted a $271 million net loss. The company received just $187 million of cash from its operating activities.
Importantly, the debt costs dearly for Arch Coal. What's more, the debt covenants restrict the company's refinancing activities. That's why Arch Coal is making those moves. The company finished the third quarter with almost $1.4 billion of cash on hand, and decided it was time to free itself from some of the restrictions imposed by existing debt.
Arch Coal's situation is typical for coal miners nowadays. For example, Walter Energy's latest bond offering was 9.5% notes due 2019. As the coal market is reluctant to improve, bond yields for coal miners can easily cross the 10% mark somewhere closer to 2015.
Alpha Natural Resources has recently made amendments to its credit facility to improve its financial flexibility. The need for refinancing seems inevitable for coal miners. Walter Energy, which is a pure met coal play, and Alpha Natural Resources, which has been recently increasing its met coal presence, are in a slightly better position than thermal-coal-heavy Arch Coal. However, the risks of rising rates are present for them as well.
Will it help?
This is just the beginning of the refinancing story for Arch Coal. The company will have to repay its $1.63 billion term loan in 2018. Thermal coal fundamentals don't seem to be improving. While met coal prices could benefit from the continuing growth of steel production in China, thermal coal prices are likely to remain under pressure.
I do not think the above-mentioned moves change the picture for Arch Coal. The company will continue to face the same difficulties it was facing before. Arch Coal must make additional improvements on the cost front to make its production profitable at current prices.
I do not see upside for Arch Coal. Thermal coal itself is not a growth story right now, and Arch Coal is unprofitable in the current environment. The big debt will continue to weigh on company's prospects. The biggest risk is that coal prices stall around current levels, and Arch Coal will be unable to find additional cost savings to return to profitability.
In that case, the price of financing will increase even more, putting the company's future under question. On the other hand, the downside is limited as well, as Arch Coal already trades at just 35% of its book value.
The Motley Fool's Top Stock for 2014
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!
The article This Coal Miner Will Remain Under Pressure originally appeared on Fool.com.Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.