S&P Puts Arch Coal on Negative Watch (ACI, PCX, JRCC, ANR, BTU)

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Credit rating agency Standard & Poor’s has put coal miner Arch Coal Inc. (NYSE: ACI) on CreditWatch with negative implications, threatening a one-notch downgrade to the company’s current ‘junk’ rating of ‘BB-’. S&P states the obvious:

Operating conditions for domestic producers of thermal coal and, to a lesser extent, metallurgical coal remain very difficult due to a mild winter, natural gas substitution in the U.S., and slowing steel production overseas. In our view, these conditions are likely to decrease demand and hurt contract pricing into 2013.

It is possible to say the same thing about other US coal producers, including Patriot Coal Corp. (NYSE: PCX), James River Coal Corp. (NASDAQ: JRCC), Alpha Natural Resources Inc. (NYSE: ANR), and Peabody Energy Corp. (NYSE: BTU). Credit ratings on all these companies is in junk territory: in late March, James River’s rating from S&P was cut to ‘B-’ and the company remained on CreditWatch with negative implications; James River’s rating is ‘B+’ and it, too, is on negative watch at S&P; Alpha’s rating at Moody’s is ‘Ba2’ and its outlook was revised in February to ‘negative’; and Peabody gets a rating of ‘Ba1’ with a ‘stable’ outlook from Moody’s.

There are those who believe this is a buying opportunity. Analysts at Sterne Agee are pleased with production cuts, particularly at Patriot Coal, and also says that it would “add to positions” in Alpha, Peabody, and James River. The implicit assumption here is that the coal situation won’t deteriorate further.

Arch Coal came with 25 cents of its 52-week low this morning. James River was within 30 cents of its 52-week low and Patriot Coal was within 50 cents. But to believe that this is the bottom is really only a bet on the weather. Steel production is flat, especially in China, and in the US fuel switching to natural gas doesn’t have much further to run but that doesn’t mean that coal will make a comeback. A really hot summer in the US could improve demand for electricity to cool the country’s homes and offices, but that will only be temporary. More far-reaching are limits on carbon emissions that could lead to the shuttering of many more coal-fired generation.

Arch Coal’s shares are down -3% at $9.35 just before noon today, in a 52-week range of $9.05-$35.06.

Paul Ausick

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