July 16, 2012 / 8:34 PM / 7 years ago

Coal companies Alpha, Arch downgraded, stocks drop

(Reuters) - One week after Patriot Coal filed for bankruptcy, BMO Capital Markets downgraded two other Appalachian coal producers, Alpha Natural Resources Inc ANR.N and Arch Coal Inc ACI.N and their share prices dropped.

Analyst Meredith Bandy cut the ratings on Monday on Alpha and Arch to “underperform,” citing high debt levels, deteriorating margins and weak demand for Appalachian coal.

She cut her estimate for Alpha’s 2013 results from a profit of 24 cents per share to a loss of $1.23 per share. She also lowered the company’s share price target to $5.00 from $18.00 and cut Arch’s share price target to $4.00 from $10.00.

Alpha shares fell 10.2 percent to close at $6.85 on the New York Stock Exchange. Arch shares ended down 3.9 percent at $5.90.

In her note, Bandy said the downgrades came after a review of U.S. thermal coal exposure, balance sheets, margins and relative valuations.

The prices for thermal coal, which is used by utilities to fuel power plants, have slumped 20 percent this year in the central Appalachian region of Virginia, West Virginia and eastern Kentucky. In addition to a mild winter that reduced electricity demand, some power companies have switched from coal to cheaper natural gas, forcing coal producers to slash jobs and cut production.

“Expected closures in Appalachia may also exacerbate financing issues,” Bandy wrote.

Patriot Coal Corp PCXCQ.PK on July 9 became the first U.S. coal producer to seek court protection from its creditors since coal prices began to plummet.

Bandy noted that, last month, Alpha said the lenders on its $1.6 billion credit facility had amended covenants for 2013-14. But she said Alpha was well within the net secured leverage ratios.

“Alpha would have to fully draw down the revolver and see a more than 10 percent decline in coal pricing to trip the covenants,” she wrote.

Another analyst, Michael Tian, of Morningstar, in Chicago, said that, although the Patriot bankruptcy was not good for the coal sector, he did not see any fundamental financing problems looming for other companies with big operations in Appalachia.

They have renegotiated their covenants,” he said of Alpha. “The concerns are well-founded, but we don’t see any more bankruptcies in the next few years.”

Alpha said last month it would stop production at four mines in Kentucky, reduce thermal coal output and cut 150 jobs. It said low prices and high costs had taken a toll on its profits.

Arch Coal cut its by workforce on July 9 by about 10 percent, closed three higher-cost mining complexes and lowered capital spending plans.

Bandy said BMO’s estimates now assume an increase in costs as thermal coal volumes drop and steel-making metallurgical coal makes up a greater proportion of total Appalachian production.

She said BMO does not see cash costs moderating until 2014-16, although better pricing for metallurgical coal will slightly improve margins.

Alpha’s production is seen dropping from just under 60 million tons this year to 52 million tons by 2014, Bandy said. BMO assumes thermal coal production cuts will continue in 2013-14 as high-cost thermal mines are idled and current curtailments become permanent. (Reporting by Swetha Gopinath in Bangalore and Steve James in New York; editing by Saumyadeb Chakrabarty, John Wallace and Andre Grenon)

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