Low Prices to Spoil Walter 1Q

Depressed coal prices and flattish sales volumes are expected to affect Walter Energy Inc.’s (WLT - Analyst Report) first quarter results. The company expects its first quarter 2012 sales volume to be 2.4 million metric tons, flat quarter over quarter. The average selling prices are expected to be lower than the sequentially preceding quarter. Walter’s Hard Coking Coal (HCC) variety sales price is expected to be down 10% while its pulverized coal injection (PCI) variety is estimated to decline by 15% sequentially.

The company decided to counter the sluggish market by shifting its production to more profitable mines in Alabama and Canada. Besides, Walter has decided to lower production from the high cost generation mines. In this effort it has cut down output from the Maple coal mine in West Virginia by 35% for the second quarter of 2012.

Walter Energy expects total production in the first quarter 2012 to be in the range of 2.8 million to 2.9 million metric tons, reflecting both year-over-year and sequential growth. Riding on first-quarter production, Walter maintained its full year guidance in the range of 11.5 million to 13 million metric tons of which 75% will be HCC and 25% will comprise PCI coal.

The lackluster demand is attributed to a slower rate of economic growth in the US and Europe combined with a sudden contraction in China and other emerging markets. Metallurgical (met) coal is also the major raw material for steel production. The steel industry at present is reeling under the debt crisis in Europe, which in turn has lowered the demand for met coal.

However, we expect this slackness in coal demand to be temporary. Walter’s decision to maintain its production guidance for 2012 is also an indicator to that end.

Walter Energy currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. The company competes with Arch Coal Inc. (ACI - Analyst Report) which has a Zacks #5 Rank, tantamount to a short-term Strong Sell rating.

Tampa, Florida-based Walter Energy is one of the leading U.S. producers and exporters of premium met coal to the global steel industry.