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James River Coal : Debt Issues Heighten Bankruptcy Risk

03/20/2014 | 07:59pm US/Eastern

Shares of Virginia-based mining company James River Coal Co. ($JRCC) plunged 13 percent Tuesday following the company's announcement that it missed a debt payment and was not able file its 2013 annual report.

The company has been losing money since the third quarter of 2011, with net losses reaching a record level of $165 million in the quarter ended March 31, 2013.

Ever-widening operating losses also drained the company's cash reserves, and as of Sept. 30, 2013, James River posted a mere $60.2 millionin cash and cash equivalents.

Interest payments to bond holders on $230 million in convertible senior notes due in 2018 have been delayed while management considers its options that range from restructuring debt to all-out fire sale.

But it might be too late to reverse the dire situation. Speculators are anticipating a high probability that James Coal could declare bankruptcy as soon as Q2 or Q3 of this year. Even though CEO Peter Socha vowed to further reduce production costs, the company's capital spending and Selling General &Administrative (SG&A) expenses are already at their lowest level, leaving no space for additional cuts.

James River Coal used to be one of the biggest mines in Appalachia, during a time when the region was still the beating heart of the US coal industry. But the recent downturn has forced the company to shutter many of its operations. Shares of James River Coal were trading at $25 apiece as recently as in January 2011. With large amounts of idle cash, the company made two major acquisitions in the same year--buying International Resource Partners and Logan & Kanawha Coal for $475 million in cash.

But red flags soon emerged as the company continued to bet on rising coal prices and strong demand from steel factories. Thermal coal prices dropped from $81 per short ton in mid-2011 to today's $60. Meanwhile the metallurgical coal market suffered from weaker demand from the steel industry, and this hit International Resource Partners hard.

In 2012, Moody's downgraded its outlook for James River Coal from stable to negative, pointing to the region's high mining costs. Meanwhile, Standard& Poor's lowered its rating on the company's bond, issued in 2011 in order to finance the two acquisitions, from from B- to CCC+

The company has closed four mines so far, with over 500 workers furloughed. Having no plan to revive the idled operations, the firm expected to pay $5.8 million in severance fees in the fourth quarter of 2013.

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