UPDATE 3-Alpha Natural beats forecasts on cost cuts; shares jump

Thu Feb 14, 2013 11:42am EST

* Loss ex-items 19 cents/share vs Street view loss 55 cents

* Production cuts hit revenue but improve unit costs

* Shares jump more than 15 pct on NYSE

By Allison Martell

Feb 14 (Reuters) - Alpha Natural Resources Inc, the top U.S. producer of coal used for making steel, reported a narrower-than-expected quarterly operating loss on Thursday thanks to aggressive cost-cutting, sending its shares up more than 15 percent.

The company, which curbed output last year to control costs as low prices battered U.S. coal producers, said it may "further adjust" its operations to reflect industry conditions.

Revenue tumbled in the fourth quarter and the company's operating loss widened, but the loss was much smaller than analysts expected.

CRT Capital Group analyst Kuni Chen said lower costs helped Alpha Natural beat estimates, while its cost forecasts were also better than he had expected.

"The future for a lot of these companies is basically positioning defensively for as long as possible until the markets recover," he said. "We think we're going to see more of that recovery in 2014 and 2015, so you need the cost structure and the balance sheet flexibility to make it through."

Chen said Alpha's balance sheet looked "well-positioned."

TOUGH TIMES

For the fourth quarter, Alpha's net loss narrowed to $128 million, or 58 cents a share, from a loss of $793 million, or $3.62 a share, a year earlier. Revenue fell to $1.56 billion from $2.07 billion.

The Bristol, Virginia-based company took a charge of $188 million to write down the value of assets, which it said was based on conditions in the coal market and lower expected future production, especially of thermal coal, used in power stations.

Excluding the impairment and restructuring charges and other special items, Alpha's adjusted loss was 19 cents a share. On that basis, analysts' average forecast was a loss of 55 cents a share, according to Thomson Reuters I/B/E/S.

Alpha shares rose 15.4 percent to $9.80 in late-morning trading on the New York Stock Exchange.

THERMAL POWER

Thermal coal is expected to be 35 percent cheaper than natural gas this year, according to the U.S. Energy Information Administration, and that may spark a recovery in consumption, which dropped to its lowest level in two decades in 2012. But even if demand improves, high inventories look set to delay price increases.

Prices of metallurgical coal, used in making steel, have not offered much relief, pulled down by weak demand from China, the world's largest producer and consumer of steel. Alpha Natural said its realized price per ton slid 23 percent to $121.27 in the quarter, though recent economic data may point to a gradual improvement.

U.S. coal miners have been cutting expenses, and Alpha Natural is no exception. In September, the company said it would cut about 1,200 jobs, or 9 percent of its work force, idling mines in Virginia, West Virginia and Pennsylvania, and reducing production in the Powder River Basin, a coal-rich region in eastern Montana and Wyoming.

The company said it expects to ship between 81 million and 92 million tons of coal in 2013, of which 21 to 27 percent is expected to be metallurgical coal. It shipped 108.8 tons in 2012, and 19 percent of that volume was metallurgical coal.

As with many firms that sell to the steel industry, over the long term Alpha Natural sees big growth opportunities in exporting metallurgical coal to emerging economies, where steel is needed to build infrastructure.

The average cost of coal sales for Alpha Natural's eastern U.S. operations dropped in the fourth quarter, to $68.55 per ton from $78.57 a year earlier. Costs edged lower in the west as well.

Those costs are not sustainable, the company said, but are expected to rise to just $71 to $75 per ton in the east for 2013.