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Walter Energy Inc. (WLT - Analyst Report) provided preliminary operational updates for the second quarter of 2013. Walter Energy’s second quarter metallurgical (met) coal production increased 7% sequentially to 2.9 million metric tons (MMTs).

A 0.4 MMTs increase in low and mid volatile (vol) coal production at the Alabama mines propelled the company’s overall production level. However, met coal sales took a hit, declining 11.1% sequentially to 2.4 MMTs, mainly due to late arrival of vessels.

The successful cost reduction efforts proved to be a silver lining for Walter Energy in the second quarter. The 14% decrease in production cost per metric ton (MT) at its Alabama mines shrank met coal cash cost of production per MT by 10% sequentially. Although production levels were down in the Canadian operations, plummeting met cash costs of production led to the cost deceleration.

Moreover, excluding the lower of cost or market (“LCM”) charge to ending inventory, met coal cash cost of sales per MT improved marginally from the last quarter. Coal producers like Walter Energy are currently reacting defensively to the downturn in international coal prices. They are lowering production activities at selected mines and concentrating more on cost-saving solutions.  

The company’s financial results were affected by the ongoing sluggishness in the global met coal market. This prompted Walter Energy to amend its credit facility in order to boost its financial flexibility.

In addition, Walter also reduced its regular quarterly dividend to 1 cent per share from 1.25 cents. The revised dividend will be paid on Sep 6, 2013, to shareholders of record at the close of the business on Aug 6, 2013.

We expect the combination of met coal supply glut in Asia and demand slackness in China compounded by fragile demand from Europe to weaken global met coal prices. This will hurt Walter Energy’s exports. In addition, China’s efforts to indigenously produce met coal would threaten the company’s met coal exports.

At the moment, Walter Energy holds a Zacks Rank #4 (Sell). Coal operators like Arch Coal Inc. (ACI - Analyst Report) are also finding the going tough in this macro backdrop.

However, stocks that are particularly looking good in the space are Zacks Ranked #2 (Buy) Alliance Resource Partners L.P. (ARLP - Snapshot Report) and SunCoke Energy Partners L.P. (SXCP - Snapshot Report).

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