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CEO: Maintaining discipline in coal, but 'you can't run any company out of fear'

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Alpha Natural Resources CEO David Stetson told S&P Global Market Intelligence that while a coal company executive today should not be afraid to make moves to grow and improve the business, success in today's market and going forward will likely require discipline.

S&P Global Market Intelligence

Coal market conditions have improved significantly since Alpha Natural Resources Inc. emerged from bankruptcy July 2016. Contura Energy Inc. took many of Alpha's larger assets in a reorganization spinoff, and Alpha CEO David Stetson said in an interview with S&P Global Market Intelligence that the outlook for the smaller company that remains is bright.

The notion that Contura was getting the crown jewels of the reorganization and that Alpha would remain in business primarily to fulfill duties toward reclaiming legacy coal mining properties, Stetson said, is a bit of a misconception. The company operates 13 underground mines, six surface mine operations and seven preparation plants, and holds over 800 million tons of metallurgical and thermal coal reserves. Alpha originally projected it would sell 13 million tons of coal in 2017, a figure that it has revised to more than 14 million tons, split between about 55% metallurgical and 45% thermal coal.

"We certainly were left with legacy properties, but the fact of the matter is we were left with the best metallurgical mines in the Central [Appalachian] region with significant production," Stetson said in an interview at the company's new Kingsport, Tenn., headquarters.

Alpha has also hit several significant milestones on its way to trimming its obligations. The company has reduced outstanding permits from 692 to 557 while reducing bonding obligations from $402 million to $369 million between July 2016 and March 2017. The company has also formed a dedicated idle property group tasked with divesting properties and reducing liabilities from those properties. Two properties have already been divested, reducing annual holding and maintenance costs by $3.8 million and reducing future reclamation costs by $18.4 million.

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Stetson, who took over when former Alpha CEO Kevin Crutchfield went along with Contura, said Alpha has even been able to use some of its idle properties geared toward reclamation to meet some unexpected spot coal sales to new customers. The coal miner also paid off bankruptcy exit financing of $125 million and secured a new facility for up to $85 million, a move that significantly cut interest costs.

Stetson said Alpha is anticipating a slow slide in metallurgical coal prices now after a recent spike due to new metallurgical coal supply coming online. While some met coal producers are bringing on new production months after prices finally took a turn, Alpha is planning to hold production in the range of about 13.5 million to 14.5 million tons per year.

He noted that about 75% of the coal Alpha sells is sold into fixed contracts over the year, while most of the rest goes into the international market on an index-based pricing mechanism. The executive said he is comfortable with the company's conservative strategy and is seeing strong sales from customers.

Stetson has served as CEO, chief restructuring officer and senior adviser for multiple energy companies, including leadership positions with Trinity Coal Corp., RAAM Global Energy, JW Resources Inc and other companies that have seen financial stress. Alpha, like many of its peers, turned to bankruptcy after accumulating large debt loads to acquire metallurgical coal properties in what ended up being the top of the met coal market. Stetson said Alpha will be playing it conservatively with an eye on not repeating coal history as it builds the future of its business.

"People like myself understand you don't overleverage yourself, you don't overextend yourself," Stetson said. "What we're trying to do here is stay disciplined. We're trying to focus our attention on our cost. We're trying to focus our attention on capital projects where we're trying to bring optionality back to the company."

Stetson is weighing capital opportunities very carefully and selectively. The CEO said such decisions are based on a conservative model based near the bottom range of coal prices.

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"You can't run any company out of fear. You have to use the best common sense you have," Stetson said. "If I'm doing a project that needs $180 port price to it, then if that price drops to $130, I'm in serious trouble. So, the key for us, for Alpha, as well as for everybody else, is making you sure you don't overshoot your skis."

Stetson noted the market will likely maintain some volatility. Ramaco Resources Inc.'s plan to bring on more met coal, for example, could push down prices as more supply hits the market. Still, he said he would "guarantee" if prices go up, more met coal will come to market.

"You hope everyone doesn't run and start producing a lot of coal, but that's not how this industry works," Stetson said. "We're our own worst enemies, right? We see the price go up and everybody wants to throw coal at it, because who wants to say 'why don't you two throw coal at it, I'll sit here and be conservative?' That's not going to happen."

Throwing that coal is easier in 2017 than recent years as capital markets, once closed to coal companies as many spun into bankruptcy, are open again.

"It's the oddest thing there is. All the companies file bankruptcy, right in 2015 and 2016, and they wipe out billions and billions and billions of dollars of debt," Stetson said. "You'd think that it would be — and it was — extremely difficult during those days, in fact it was impossible, to find capital. Then all of a sudden you saw the price take a turn and then everybody flies back into it."

Stetson said much of that is optimism on rising metallurgical and international thermal coal markets and a new presidential administration. While he believes it is too early to know what sort of an effect President Donald Trump will have on coal's future, he's not expecting much more than him to "help us on the bureaucratic and regulatory front."

"I was one of the individuals who did not look at the Trump administration as being able to bring back thermal coal production," Stetson said. "What he'll do is bring back some metallurgical coal production with the buying of U.S. steel products. That may enhance the metallurgical side. The thermal side, he may simply slow down the process of retirement, but I never looked or I never expected the Trump administration to revive the thermal coal industry in the United States."