November 7, 2012 / 1:00 PM / 5 years ago

UPDATE 3-S&P cuts James River Coal to 'selective default'

* James River buys back debt at 39 cents in the dollar

* S&P says discounted debt repurchase tantamount to a default

* Shares fall 32 pct (Adds conference call details, S&P rating cut)

By Swetha Gopinath

Nov 7 (Reuters) - Standard & Poor’s Corp slashed James River Coal Co to ‘selective default’ after the coal miner said it had repurchased debt at less than half the face value and reported a bigger-than-expected quarterly loss.

James River shares fell as much as 32 percent to $3.20 on the Nasdaq after the repurchase was announced, with analysts concerned the company had used cash to buy back debt when it faces a liquidity squeeze amid sliding coal prices.

Other coal stocks fell on fears of stricter environmental regulations during President Barack Obama’s second term.

The company said it had bought back debt with a face value of $61.4 million, about 9 percent of its total, for $23.9 million between July 1 and Oct. 12.

Ratings agency S&P said the repurchases, at a roughly 60 percent discount, were tantamount to a default given the steep discount and the relative size of the transactions.

“We consider the discounted note repurchases constitute a de facto restructuring,” it said in a statement.

Analysts warned that the repurchase would dent cash reserves, though some said it would help the company cut costs.

James River has been struggling with high costs and diminished cashflow due to weak demand for coal from steelmakers and power producers in the United States.

“(The) surprise $61 million debt repurchase (is a) great deal at 39 cents per $1 face value, but erodes the $170 million liquidity cushion,” analysts at Tudor Pickering Holt said in a note to clients.

James River Coal, which had debts of $589.5 million as of June 30, said available liquidity fell to $172 million at the end of the quarter from the $191.9 million at the end of the second quarter.

“Opportunistic purchases like these help the company’s balance sheet and James River Coal still has $151.4 million in cash,” analysts at Simmons & Co said in a note to clients.

S&P, however, said James River Coal’s liquidity was “less than adequate,” given that the company would likely burn cash in 2012 and 2013. U.S. coal miner Patriot Coal Corp had filed for bankruptcy protection in July.

On a conference call with analysts, James River Chief Executive Peter Socha said the company is considering a new term loan or flexed revolver loan to cut costs.

PRODUCTION CUTS

James River will continue to cut the output of metallurgical coal, used to make steel, in response to lower industry demand, CEO Socha said on the call.

Metallurgical coal prices, which were as high as $225 per tonne four months ago have settled at $140/tonne due to slow economic growth in top buyer China.

James River, which diversified into the more lucrative steel-making coal last year, has already suspended operations at one coalmine operated on its behalf by a contractor.

It has also cut hours in its Kentucky operations that produce thermal coal used for power generation.

James River is not the only U.S. coal to cut output this year. Coal production in the country will drop to its lowest level in two decades in 2013, the U.S. Energy Information Administration (EIA) said in its Oct. 10 energy outlook report.

James River also said it had signed agreements to ship 1.3 million tons of Central Appalachian coal at an average price of $70.63 per ton in 2013.

“This is slightly above the current curve for 2013, but still below James River’s average cash cost of production,” analysts at Simmons & Co said in a note to clients.

The analysts also said it would take “a large improvement” in the metallurgical or thermal markets for the company’s results to improve.

James River’s third-quarter adjusted loss was $1.23 per share, exceeding the $1.04 per-share loss analysts had estimated, according to Thomson Reuters I/B/E/S.

Net loss widened to $20.6 million, or 59 cents per share, from $3.7 million, or 11 cents per share, a year earlier.

Revenue fell 5 percent to $288.1 million, but was higher than the average estimate of $261.7 million.

James River stock, which has nearly halved this year, was down 23 percent at $3.61 in afternoon trade. (Reporting by Garima Goel in Bangalore; Editing by Sreejiraj Eluvangal)

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