Alpha Natural Resources Inc. CEO David Stetson sits in his old office in Kingsport, Tenn. in an early 2017 photograph. The company is approaching a two-year anniversary on emerging from bankruptcy and recently moved its headquarters to Bristol, Tenn.
? Met coal's recent improvement is on fundamentals, not an 'act of God.'
? M&A would be nice, but Stetson is skeptical it can happen.
? New coal demand is likely limited, but so is new coal supply.
Alpha Natural Resources Inc. was once one of the largest coal companies in the United States. After filing for bankruptcy in 2015, Alpha spun out Contura Energy Inc., an organization with many of the legacy company's largest assets, including major Powder River Basin mines later sold to a third party. What was left of Alpha had been characterized as an entity focused on reclamation, but new Alpha CEO David Stetson said that was a misconception and insisted Alpha was left with some of the best metallurgical coal mines in Central Appalachia.
As metallurgical coal markets continue to show strength after recent improvement, S&P Global Market Intelligence talked to Stetson about the future of Alpha and the coal industry. This is an edited transcript of the interview.
David Stetson is the CEO of Alpha Natural Resources, a Central Appalachia focused coal mining company.
S&P Global Market Intelligence: What's your take on the outlook for metallurgical coal from the U.S.?
David Stetson: Unlike some previous occasions where we've seen an uptick in pricing, from our view, it's more about fundamentals this time. We're seeing persistent supply tightness and improving demand. I think that's what's driving the market and I think the consensus is we're going to continue to see a strong metallurgical market for the near future.
That was before the tariffs being imposed by President Trump. You've seen some of the reaction from some of the steel mills where they are getting ready to re-fire up some of their facilities.
I think in this particular instance, it's not an act of God that created the problems, but rather it's true economic fundamentals.
What about thermal coal from the U.S.? Is there a possibility we ever see a new coal plant built in the U.S. again?
We're not doing any type of modeling or anticipating new facilities. I've seen some recent press that indicates that could be something being explored.
I think you're going to continue to see a tightening inside the United States in demand for the thermal product. You're also not seeing any new greenfield products, certainly not in the Central App region that are applicable. Therefore, from our perspective, we think the thermal market will continue to remain strong in the short term.
Is there capital available out there to back any potential new coal mines?
On the metallurgical side, I think everyone is waiting for sustained, higher prices in order to start those projects. We've actually started several projects, expansion of our existing organic reserves, that I would argue would be deemed to be greenfield in that sense. But no, I think the next capital project you might see is [expansion at Arch Coal Inc.'s Leer mining complex]. But, right now, I think a lot of the CapEx is being spent on upgrading the equipment and necessary maintenance.
How has the election of President Donald Trump shaped prospects for the coal industry?
I think he has had an impact on the thermal side in a way that I think is very constructive for the coal industry. I think what President Trump has brought to the table is the demonizing of coal that existed in the prior administration has been eradicated and what we have seen is a greater cooperation among and with the regulatory agencies on both a state and federal level.
I did not believe, nor do I think President Trump ever suggested that he was going to create an atmosphere in the United States where you were going to start seeing a greater thermal burn. What I think he was trying to do and what we've seen is trying to ease some of the regulatory burdens that we all have experienced in the past.
We're now several months out from a huge wave of bankruptcies in the coal sector. How has the industry changed since a few years ago as a result?
From an Alpha perspective, [we had] right around $5 billion of debt, we currently have around $150 million of debt. The biggest thing you saw out of the bankruptcies was the lessening of debt loads which then allows greater free cash flow and allows greater opportunity to utilize free cash flow for whatever means each company deems appropriate.
You've seen some of the companies like Warrior Met Coal Inc. and some of the companies like Arch do dividends or share repurchase programs.
From Alpha's perspective, we utilized the cash flow we generated to ensure long-term sustainability by putting our capital into projects. We have four capital projects that have either been completed or are underway right now.
Is there any potential for mergers and acquisitions in the U.S. coal space?
I think all the talking heads and analysts involved indicated that they think that M&A is inevitable and should occur. While I certainly agree with everyone — it would be nice to see a little bit more consolidation in the Central App region and specifically from a met perspective — I think there are structural impediments to that occurring, that is, both a lack of capital and how you are going to structure the transaction and synergies you'll receive.
You have said the coal sector can be its own worst enemy when it comes to supply discipline. Has that situation improved?
I think in this case, we've seen some new coal hit the market but there are some headwinds to that. The headwinds to a lot of coal hitting the market on the met side is capital.
While I certainly think the industry has a tendency to kill itself, I think in this instance you might see some production come into the market, but I don't know that you will see, especially with the demand that's out there, an oversupply at this point in time.