VANCOUVER — In 2011 the metallurgical coal market was hot. Chinese demand seemed insatiable and floods had disrupted Australian supplies, pushing prices as high as US$300 a tonne.
Betting the market would remain in high gear, Walter Energy (TSX: WLT; NYSE: WLT) bid $3.3 billion for Vancouver-based Western Coal to cement a dominant position in the North American coal market.
Turns out it was the wrong bet. Prices for metallurgical coal have since plummeted more than 60%, and on April 15 the Alabama-based company announced plans to mothball the entire suite of coal mines it paid for so dearly just three years ago.
The Western deal gave Walter three mines in northeast B.C. The company shuttered one of them, Willow Creek, in mid-2013. Now it is idling the Wolverine mine and will shut down the Brule operation in July. Combined, the three operations produced 3.6 million tonnes coal in 2013.
Observers have been expecting Walter to make this sort of move. In 2013 it cost Walter US$103 to produce each tonne of coal at its non-U.S. metallurgical coal mines, which include the three in B.C. and one underground operation in Wales.
Once additional costs such as freight, royalties, labour, fuel and sales are included, the cost per tonne came in at US$143.06 — below the 2013 average net selling price of US$135.93. In other words, Walter’s B.C. coal mines were bleeding cash.
Coal prices are even softer today. With no major supply disruptions, world output on the rise and China’s growth slowing, the market is oversupplied and the latest quarterly contracts settled at just US$120 per tonne, the lowest level in six years.
Willow, Wolverine and Brule all offer high-quality coal reserves, but the disconnect between costs and prices means Walter is better off leaving the coal in the ground until prices improve.
“The announcement is not unexpected, as the assets are not competitive in the current metallurgical coal market given the cost structure and product quality,” RBC Capital Markets analyst Fraser Phillips said in a note.
The closures mean 695 employees will lose their jobs, in addition to the 250 who were laid off when Walter suspended Brule in mid-2013.
The dramatic drop in coal prices has decimated Walter’s share price. The company boasted a market capitalization that exceeded US$8 billion in early 2011, when it spent $3.3 billion on Western Coal. At press time shares were down 90%, cutting Walter’s market capitalization to less than US$550 million.