Walter Energy 1Q14 Earnings Call Notes

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

We’re controlling the controllables

‘The bottom line is this: Yes, the market continues to be plagued by low met coal prices, but consistent with our message over the past several quarters, Walter Energy continues to execute extremely well in the areas we control.”

Cost performance was “outstanding”

“Cost performance was also outstanding, with production cost per ton 23% lower than last year’s first quarter.”

No debt maturities until 2018 and minimal covenants

“The financing has removed all significant debt maturities until April 2018 and extended our revolver until October 2017. As well, we entered into an amendment to our credit agreement that eliminates financial covenants, with the exception of one springing covenant for those revolving credit lenders that extended their commitments. ”

“Yes, the springing covenant comes after we have, in effect, $95 million drawn on the line, excluding LCs.”

Seen some production cuts, but need more

“On the global met coal production side, we’re starting to see production cuts, with over 10 million tons in announced cuts recently. The majority of the recent cuts have been in the U.S. and Canada. We believe there is still excess supply in the market. However, we also believe that we’ll start to see cuts from some of the higher-cost Australian producers, along with more cuts in the U.S. and Canad”

Liquidity position is better than at any other point this cycle

“we’re better positioned financially than we’ve been at any point in the current cycle, with no significant debt maturities until 2018 and with liquidity close to $700 million. ”

Going to generate about 125m in cash from inventory destocking

“ooking at today’s pricing, we could expect, over the next 12 months — and really, we’re focused trying to get it done by year end, somewhere between $125 million, maybe a little higher than $125 million, from inventory. So that will be the biggest single component.”

Take a few months to get back to full production once mines shut down

“So the restart of those operations will be, as we’ve talked in the past, the — one of the concerns in Northeast B.C. is the availability of labor. And the longer these operations are idle, the — probably, the longer period it will take to ramp them back up to full speed. I would expect that we could ramp them up over a 30-day period and start to get reasonable production levels, but probably, it’s going to probably take at least 2 to 3 months to get back to full production levels during ramp-up. And during ramp-up, you’re going to have almost full cost and less tons during that period.”

Not planning on fire selling assets. “there is no liquidity concern in this company”

“Yes — no, I think on the $250 million asset sales, as I mentioned on the last call, the timing is dependent on the recovery in met markets. And there is no liquidity concern in this company, and we’re not going to fire-sale assets. So we remain committed to the target, but at this point, we have nothing further to add. It will be dependent on the met coal markets.”

Dropping capex spending even lower

“The CapEx for the year, we started off with a target of $150 million. We’re dropping that to about $130 million. And of the $130 million, the majority of that, probably $120 million or even a little more than that, is maintenance capital. And the $10 million in growth capital is really around permitting and just doing a little work, looking at reserves and exploration-type work. So the absolute majority of it is maintenance capital.”

Costs were good this quarter but they are variable

“as underground coal mines, you’re going to have — sometimes, you have an outstanding quarter. Sometimes, you have some hiccups that drive your cost up a little bit. I think what — at this point, we’re just willing to reiterate that we expect Mine 7’s costs to be similar to where it was last year by year end. They didn’t have any longwall moves in the first quarter. They’ll have 2 longwall moves later in the year, and those quarters, typically, drive cost up a little bit. And you also have vacation periods, things like that, to drive cost up a bit. So all in all, while they did have an outstanding quarter — and frankly, fourth had a little bit of a rough quarter, all in all, we think, for the year, they’re going to get to those numbers that we had disclosed previously.”

Dont think they need to access capital markets, liquidity from working capital significant

“No, we don’t see the need for that. I think our liquidity at $676 million plus the benefit we’re going to get from working capital is pretty material. We never say never about anything, but at this point, we don’t see any need.”

Not going to sell the core assets

“the real strategic assets we have in the company are the Canadian operations and the 2 big Alabama operations. Those are the real core operations, and while we — and we’ve talked about potential partnering in Canada. So anything that’s really not in the core, by nature, is available and is considered non — or is non-core. Now we do have a couple of others that are non-core but strategic things, such as — the coke plant and the gas companies are both we view as strategic but non-core. So that means we have got the assets in the U.K. We have assets in West Virginia. We have some surface assets in Alabama. So really — it’s really only — the only limitation is the core asset.”

The debt to equity swap is not a big program

“We have no plans at this point to do anymore. We have no plans not to look at things, but we don’t want to understate that we do value the equity, but we also look at our interest expense and we wanted to offset the March refinancing, which did raise our interest expense. And as we mentioned on the call, it’s now — it’s come down to — that went up, and now it’s come down slightly to the $255 million per year. So we’re not ruling anything out, but we’re not in the middle of a huge program, by any means.”

We understand that our shares are undervalued

” we do understand that our shares are undervalued. I know that there’s some dialogue about what dilution — we read some things. I think people need to run their numbers, and from our point of view, we wanted to — the first step of it was to offset the financing in March, reduce our interest expense and — as well as reduce our SG&A to manage fixed cost.”

It takes time to move the PCI inventory

“we’ve been moving the PCI product as fast as we could across the transportation system we have up there, and we’ll just continue to do that. So it’s not going to be, in any way, accelerated because there’s any urgency. It’s just — that’s what is going to take us to get that go-to-market, and we’ll move it to those customers. And I think you’ll see, over the course of the year or through the next 3 or 4 quarters, PCI sales will, probably, maybe, not be flat but won’t be down much.”

Alabama coal tends to go to South America and Europe, not Asia

“So on a yearly basis, we have typically shipped a cargo or 2 out of Alabama in Asia. That’s about it. And frankly, given where pricing has been and where freight rates have been, there just hasn’t been a whole lot of coal moving from Alabama in that direction. Our coal tends to sell out with South America and Europe out of Alabama.”