Alpha Natural Resources inc. c (NYSE:ANR)

First Quarter 2012 Results

• Total revenues in the first quarter were $1.93 billion compared to $1.13 billion in the same period of 2011, and coal revenues were $1.64 billion, up 66 percent compared to $0.99 billion in the first quarter of 2011.
• Excluding these items and related tax impacts, the first quarter adjusted net loss was $58.2 million or $0.27 per diluted share compared to adjusted net income of $78.9 million or $0.65 per diluted share in the first quarter of 2011.

"During the first quarter, Alpha's workforce continued to deliver on our shared commitment to Running Right," said Kevin Crutchfield, Alpha's chief executive officer. "We recently announced that eight operations received MSHA's 2011 Sentinel of Safety certificates, and two operations received Mountaineer Guardian Safety awards. In addition, Alpha's incident rate improved 21 percent in the first quarter of 2012, compared to the last seven months of 2011 since the closing of the Massey acquisition. We salute the successful efforts of our workforce, but the loss of a member of the Alpha family at the Kingston No. 2 mine reminds us that Alpha's safety goal is zero incidents. To that end, we remain dedicated to Running Right and continuous improvement in our safety performance."

"Alpha responded swiftly to challenging market conditions, reducing planned 2012 production volumes by approximately 4 million tons based on actions announced in early February. Since then unusually mild winter weather and decade-low natural gas prices have significantly reduced domestic steam coal consumption and driven utility inventories to near record levels. In response coal producers continue to announce plans to reduce production. Alpha plans to introduce additional production adjustments in the near future. Accordingly, we are reducing the midpoint of our 2012 shipment guidance by an additional 7 million tons of steam coal. The market for metallurgical coal has also softened somewhat, particularly for lower-quality metallurgical coals, due to increased global supply and a geographically mixed demand picture. In response, we are reducing the midpoint of our shipment guidance for metallurgical coal by 0.5 million tons. In this environment, Alpha will remain focused on selectively pruning our portfolio, controlling costs, and maximizing free cash flow generation."

Outlook
Alpha is updating its 2012 shipment guidance ranges. The Company now expects to ship between 20.0 million tons and 24.0 million tons of Eastern metallurgical coal, compared to the previous range of 20.0 million tons to 25.0 million tons. Eastern steam coal shipments in 2012 are now expected to range from 38.0 million tons to 44.0 million tons, compared to the previous range of 42.0 million tons to 48.0 million tons. Western steam coal shipments out of the Powder River Basin in 2012 are anticipated to be in the range of 42.0 million tons to 48.0 million tons, compared to the previous range of 45.0 million tons to 51.0 million tons. As of April 20, 2012, 78 percent of the midpoint of anticipated metallurgical coal shipments were committed and priced at an average per ton realization of $146.31; 99 percent of the midpoint of anticipated Eastern steam coal shipments were committed and priced at an average per ton realization of $66.78; and 100 percent of the midpoint of anticipated PRB shipments were committed and priced at an average per ton realization of $12.83. Alpha's expected range for the cost of coal sales per ton in 2012 is $75 to $79 in the East, compared to the prior guidance range of $72 to $77. The increase in Eastern cost of coal sales per ton is due to the reduction in expected shipment volumes and a mix shift with proportionally more metallurgical and less thermal coal shipments. The expected range for the cost of coal sales per ton in West is unchanged at $10.50 to $11.50. Selling, general and administrative expenses are anticipated to range from $210 million to $230 million for 2012, compared to prior guidance of $220 million to $240 million. DD&A expense is expected to range between $1.1 billion and $1.2 billion, compared to the prior guidance of $1.05 billion to $1.15 billion. Interest expense guidance remains unchanged at $175 million to $185 million. Anticipated capital expenditures for 2012 have been reduced by $100 million to a range of $450 million to $650 million, compared to the prior guidance of $550 million to $750 million.

"Amid a turbulent time in our industry with unprecedented regulatory challenges, a bumpy and gradual economic recovery and near-term weakening of metallurgical coal demand and pricing, Alpha once again delivered consistent results during the second quarter generating EBITDA from Continuing Operations of $199 million. Our position as arguably the most diversified U.S. producer of coal serves us well in these rapidly changing markets. During the second quarter, Alpha significantly increased its met coal shipments and realizations, largely offsetting the impact of a month-long longwall move at the Cumberland mine. This compares to the previous quarter when the Pittsburgh #8 longwall mines in Pennsylvania contributed nearly half of Alpha's EBITDA as met coal shipments were still ramping up. Alpha continues to generate substantial amounts of free cash flow and, with total liquidity of approximately $1.5 billion, we believe we are well-positioned to grow the company organically or through acquisitions in the future. In my view, Alpha's consistently solid performance following our merger, which reached its one-year anniversary just a few days ago, validates the success of our long-term strategy for growth and diversification.

"While our focus on growth remains unchanged and continues to be our primary objective, we took advantage of what we believed were extremely attractive valuation levels in the U.S. coal sector during the second quarter and implemented our first-ever share repurchase program. The Alpha board authorized share repurchases up to as much as $125 million, and during the second quarter Alpha repurchased approximately 700,000 shares at an average price of $36.32. We will continue to seek opportunities to repurchase shares at attractive valuations pursuant to current and future Rule 10b5-1 plans and potentially from time to time at management's discretion."

China Remains Strong:

Global demand for metallurgical coal remains strong despite cyclical challenges, including the near-term slowing of economic growth in China and uncertainties surrounding European economies. Steel production is increasing globally and is primarily being driven by China. Despite a widely anticipated slowdown in the second half of the year, China remains on track to produce roughly 620-630 million tonnes of steel, up approximately 10 percent from 570 million tonnes in 2009. Chinese metallurgical coal imports have risen from nearly flat in 2008 to 34 million tonnes in 2009, and China is on pace to import more than 40 million tonnes in 2010. While internal met coal resources can be developed and imports from Mongolia can be increased over time, China is likely to remain dependent on seaborne imports of high quality metallurgical coal for the foreseeable future. As with thermal coal, India may offer the more persistent long-term growth opportunity for seaborne metallurgical coals due to the absence of quality domestic reserves. Indian imports totaled 28 million tonnes in 2009 but are projected to ramp steadily, nearing 50 million tonnes by 2015. In this environment of growing metallurgical coal demand and limited sources of supply globally, prices have tested near-record levels.

Outlook

Alpha is maintaining its previous guidance for 2010 and 2011 shipment volumes of Eastern metallurgical coal, Eastern steam coal and Western steam coal. Alpha is also maintaining its previous guidance for Eastern and Western cost of coal sales per ton; depletion, depreciation and amortization expense; interest expense; and capital expenditures for 2010. The guidance for selling, general and administrative expense, excluding merger-related expenses, has been slightly increased to reflect updated estimates for incentive compensation and certain professional fees.

"Turning to Alpha's financial results, I am pleased to report that Alpha generated record EBITDA from Continuing Operations of $218 million during the first quarter of 2010. The strong performance during the quarter highlights the value of our regional diversification which enabled us to deliver excellent results despite adverse weather conditions in the East, and underscores both the importance of our position as the leading supplier of metallurgical coal and the profitability of our Pittsburgh #8 longwall mines that contributed over $100 million of coal margin during the quarter. In April, we announced that Alpha's secured credit facility had been amended, extended and increased. Through the increased credit facility and additional free cash flow generation, Alpha's liquidity now stands at greater than $1.5 billion, a position that affords us significant financial flexibility as we plan for Alpha's future growth."

Market Overview:

After U.S. utility inventories crested at record high levels of over 200 million tons in November 2009, stockpiles fell by approximately 40 million tons to roughly 165 million tons at the end of the first quarter of 2010. The sharp reduction in utility inventories was attributable to a combination of factors, including economic recovery, severe winter weather, higher natural gas pricing during the winter heating season, and lower coal production levels. In light of the rapid inventory decrease and sustained production cutbacks, U.S. inventories are expected to return to normal levels of 140 million tons to 150 million tons during the second half of 2010.

Asian demand for seaborne thermal coal is increasing rapidly. Shipments out of South Africa's Richards Bay terminal to India and China have grown to 42 percent in the first quarter of 2010 compared to 25 percent in the first quarter of 2009. India continues to increase coal imports which are projected to exceed 100 million metric tonnes in the next few years compared to approximately 70 million metric tonnes in 2009, and India currently has more than 75GW of new coal-fired generation under construction. Chinese thermal imports during the first quarter were on an annual pace for 127 million metric tonnes compared to actual thermal imports of 88 million metric tonnes during 2009. As seaborne thermal coal increasingly moves into the Asian markets, less seaborne supply will be available to satisfy demand in the Atlantic basin, which should create additional opportunities for U.S. exports in the coming quarters.

The global market for metallurgical coal continues to strengthen as steel production increases worldwide. Chinese steel production in recent months suggests that China could produce between 630 million tonnes and 650 million tonnes of steel in 2010, up from approximately 570 million tonnes produced in 2009. Global steel production increased 27 percent and U.S. steel production increased 52 percent during the first two months of 2010, compared to the comparable period of 2009. U.S. steel production capacity utilization continues to increase and is now above 70 percent, compared to lows in the mid-30s in early 2009. Adding to the tight supply of met coal worldwide, recent weather events in Australia further limited seaborne exports. In this environment of increasing demand and limited supply, spot prices have continued to lift, reportedly reaching $240-250 per metric tonne on an FOBT basis for the highest quality metallurgical coal.