Walter Energy Sees Rising Costs, Weaker Prices Negate Production Gains in First-Quarter 2012

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Researched by Industrial Info Resources (Sugar Land, Texas)--Leading metallurgical coal producer Walter Energy Incorporated (NYSE:WLT) (Birmingham, Alabama) saw a sharp decline in profits in the first quarter of 2012, as lower coal sales prices and higher operating costs in the U.S. and Canada diminished gains in sales and production, including consolidated coal production of 3 million metric tons, which is a quarterly record for the company. Net income for the quarter was reported to be $40.62 million, a 50.36% decrease from first-quarter 2011.

Walter Energy executives stressed that results were much more favorable when adjusting for interest income and interest, income tax, depreciation and depletion expenses. Using this method, called "EBITDA," income was reported to be $143.58 million, which is only a 3.07% decrease.

Total revenues stood at $631.56 million, a 54.52% increase from first-quarter 2011. Although the average selling price of hard coking coal (HCC) was slightly higher than expected, it still was 7% lower than in the previous quarter; similarly, the average selling price of pulverized coal injection (PCI) coal beat expectations, but remained 11% below the previous quarter. Walter Energy executives say both movements reflect global coal market trends. However, the consolidated cast costs for HCC decreased 12%, which helped to offset some of the profit losses. Capital expenditures for the quarter were reported to be $120.85 million, compared with $44.29 million in first-quarter 2011.

Sales of 2.37 million metric tons of metallurgical coal were in line with the company's expectations, while the record-setting consolidated production of 3 million metric tons was double that of the same period last year. The production boom was attributed heavily to the acquisition of Western Coal (Vancouver, British Columbia), which has eight coal mines in the U.S., Canada and the U.K.

Industrial Info is tracking $802 million in active Walter Energy projects, including the $194 million Phase II expansion of the aboveground Willow Creek PCI Metallurgical Coal Mine in Chetwynd, British Columbia. The project involves upgrading and expanding the coal mine from 900,000 to 1.7 million tons per year of low-volatile, PCI coal, as well as increasing the preparation plant's capacity from 425 to 600 tons per hour. Plant equipment will be added and modified to support the adjacent Brule Coal Mine expansion project, eliminating the need to construct a plant and load-out facility.

"We are beginning to see signs of strengthening demand for our hard coking coal, as well as improved pricing," said Walt Scheller, the chief executive officer of Walter Energy, in a conference call. "While I believe that global metallurgical markets on a year-to-date basis could certainly be described as 'choppy,' over the past few weeks there have been some positive signs. Improvements in global steel pricing, reductions in steel inventories, and the tightening of metallurgical supplies have led to increased global prices and have reversed the declining trend that I know many investors have feared."

Despite the overall decline in profits, the sales results for the company's two major products were striking:

• The Metallurgical segment reported 2.37 million metric tons sold for the quarter, a 59.18% increase from first-quarter 2011, at an average net selling price of $217.97 per metric ton, a 1.86% increase.
• The Thermal segment reported 807,000 metric tons sold for the quarter, compared with 321,000 in the same period last year, with an average net selling price of $72.78 per metric ton, a 20.99% decrease.

Walter Energy executives expect full-year 2012 metallurgical coal production to total between 11.5 million and 13 million metric tons, with between 75% and 80% HCC coal, and the rest PCI coal.

"Our focus on safely growing our metallurgical production this year is beginning to pay off," Scheller said in the conference call. "We're on track to reaching our 2012 production target. Longer term, Walter's current metallurgical operations in the U.S., Canada and the U.K. have significant room for further growth and, when combined with our strong project pipeline, Walter Energy has the potential to produce more than 20 million metric tons annually by the end of the decade."

Scheller added that the company plans to move on the Blue Creek Energy project, a planned underground mine in Tuscaloosa County, Alabama. He said that the project will be greatly assisted by incentive tax legislation that recently passed the Alabama state legislature and was signed by the governor. The coal reserves were part of a transaction with Chevron Corporation (NYSE:CVX) (San Ramon, California) that was completed last year. Walter Energy also is developing a terminal in Mobile, Alabama.

For more information, visit Industrial Info's North American Metals and Minerals Project Database.

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