UPDATE: Arch Coal (ACI), Walter (WLT) & Alpha Natural (ANR) Cut to Sell at UBS on Met Outlook

(Updated - April 9, 2014 10:55 AM EDT)

UBS downgraded Arch Coal (NYSE: ACI), Walter Energy (NYSE: WLT), and Alpha Natural Resources (NYSE: ANR) from Neutral to Sell on lower met coal outlook. Walter has the highest met coal leverage, and all three have high EPS sensitivity to changes in the met coal price.

Analyst Kuni Chen said, "Based on a lower commodity price deck, we are cutting ratings, targets, and estimates for the coal sector. We are downgrading ACI, ANR and WLT to Sell (all previously at Neutral). We maintain our Neutral ratings on BTU (NYSE: BTU) and CNX (NYSE: CNX). Our preferred coal name is Cloud Peak (NYSE: CLD) as a way to play natural gas upside risks and low Powder River coal inventories. As discussed in our industry deep-dive on March 25, we remain cautious on companies with high met coal exposure due to downside risks to seaborne prices and potential balance sheet and liquidity issues."

"Our Australian Commodity Team is sharply cutting seaborne met coal forecasts (again) (see UBS Global I/O: Miner’s Price Review, dated April 8, 2014). The new price deck for 2014-15 is now $130/mt (was $146) and $130/mt (was $150). The cut to our met coal price deck reflects a larger oversupply view despite our model assuming 9 mt of US production cuts this year. In addition, the latest 2Q benchmark settlement of $120/mt was lower than expected and down 16% from $143/mt in 1Q. We think Street estimates are too high and assume a $150-$160/mt met coal price in 2015," he continued.

"In light of our cuts to EBITDA, net leverage could reach 20-25x for Alpha and Walter this year. Arch’s net leverage may surpass 15x. Cash burn should be highest at Alpha and Walter and we expect managements to take additional action to cut costs and conserve cash. A sustained weak met coal price in the $120-$130/mt range could result in a liquidity crisis for some companies by 2016," he added.

For an analyst ratings summary and ratings history on Arch Coal Inc click here. For more ratings news on Arch Coal Inc click here.

Shares of Arch Coal Inc closed at $5.18 yesterday.

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