Tickers in this Article: WLT, CVX, BTU, CNX
Walter Energy (NYSE:WLT) is making a bet on rising demand for metallurgical coal as the developing world seeks to industrialize over the next decade. The company is adding capacity over the next three years at its properties to help meet this demand.

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Walter Energy is a domestic producer of metallurgical coal, thermal coal, coke and natural gas. The company reports in three business segments: Underground Mining, Surface Mining and Walter Coke. In the trailing twelve-month period ending June 30, 2010, Underground Mining represented 79% of total sales, Surface Mining was 9% and Walter Coke was 12% of total sales.

Metallurgical Coal
Walter Energy foresees good demand for metallurgical coal, which is used in the steel making process, as emerging economies industrialize over the next few years. The company is increasing its annual capacity to produce metallurgical coal to 9.5 million tons by 2012.

Walter Energy believes the market will be tight for metallurgical coal despite sluggish global economic growth. The company estimates that demand for metallurgical coal will exceed supply by 13 million tons in 2010.

An industry expert estimates that demand for imports of metallurgical coal from South America will increase at a compound annual growth rate (CAGR) of 9.6% from 2009 to 2013. Europe will see a CAGR of 9.4% over the same time frame.

Walter Energy is working on plans to develop the 170 million tons of metallurgical coal reserves that the company has at Blue Creek. This reserve base can support up to 20 years of production.

Other Operations
Walter Energy produces steam coal at its surface mining operations. The company has annual capacity here of 1.6 million tons. Walter Energy also produces coke from some of the metallurgical coal that it produces, and reported annual capacity of 420,000 tons. Walter Energy also produced natural gas from its properties, and in 2009 reported production of 6 Bcf.

Recent News
Walter Energy recently lowered its guidance for its expected sales of metallurgical coal in 2010. The company now expects to sell between 7.2 and 7.5 million tons in 2010, compared to the previous guidance of expected sales between 7.7 and 7.9 million tons. While some might have assumed that this cut in guidance was the result of weaker demand, it was due to difficult mining conditions at Mine No. 4.

Despite the difficulty, the company continues to favor the reserves found in the area. The company recently announced its intention to purchase the North River No. 1 mine from Chevron (NYSE:CVX).

Other large producers of coal include CONSOL Energy (NYSE:CNX), which sold 14.2 million tons of thermal coal in the quarter ending June 30, 2010, and Peabody Energy (NYSE:BTU), which has operations in the United States, China and Australia.

The Bottom Line
Walter Energy is adding capacity to produce higher amounts of metallurgical coal at its properties in Alabama, as the company believes that over the next few years demand will continue to increase as the global economy recovers. (Some argue that when the free market fails to protect consumers, government regulation is required. To learn more, read Free Markets: What's The Cost?)

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