Arch reported adjusted diluted EPS for the quarter of $0.29, compared with a consensus estimate of $0.32. Eliminating the adjustments, diluted EPS came in at $0.33. Quarterly revenue also fell a bit short at $1.23 billion compared with estimates of $1.3 billion.

The company’s CEO said that Arch is reducing its production volumes in 2012 “to better align with weak generation and coal demand trends.” Here’s what the company had to say about conditions in 2011 and its outlook for 2012:

Coal markets weakened in the fourth quarter of 2011 as abnormally mild weather and muted economic growth caused U.S. power generation to decline slightly for the full year. Domestic coal consumption declined 5 percent in 2011, resulting from the decrease in power generation as well as fuel switching by power producers given decade-low prices for natural gas and abnormally high hydroelectric availability. As a result, coal stockpiles at U.S. generators rose to an estimated 180 million tons by year end, a seasonal build that is above historical norms.

In 2012, Arch currently estimates that domestic coal consumption for power generation could decline by 50 million tons or more from 2011 levels, as mild weather has reduced power demand and the current oversupply in natural gas markets could induce more coal displacement. Given anticipated declines in domestic coal use as well as U.S. generator stockpile builds, Arch believes that coal production and capital spending levels industry-wide are in the process of significant rationalization, which should set the stage for the next market upswing.

Arch shares are down nearly -4.5% in pre-market trading at $15.58 in a 52-week range of $13.09-$36.99.

Paul Ausick

Demand for coal, both the thermal variety used for generating electricity and the metallurgical coal used in steel making, declined in 2011 as coal-fired plants have been shut down in favor of gas-fired plants and demand for steel has dropped.

In the US, gas-fired plants account for about 39% of total generation capacity, but these plants have traditionally been used to meet demand spikes because natural gas was more expensive than coal. With gas prices so low (about $2.49/thousand cubic feet today), coal miners have to lower prices or reduce production or both.

A quick look at coal mining companies’ valuations is enlightening.

Alpha’s share price at around noon today is $23.19 in a 52-week range of $15.49-$61.66. The consensus target price on the stock is $29.50, for a potential upside of 27%.

Patriot’s share price is $9.19 in a 52-week range of $6.92-$27.56. The consensus price target on the stock is $11.50, for a potential upside of 25%.

Peabody’s share price is $38.38 in a 52-week range of $30.60-$73.95. The consensus price target for the stock is $49, for a potential gain of about 28%.

Consol’s share price today is $37.34 in a 52-week range of $30.56-$56.32. The consensus price target is $50, for a potential upside of 34%.

Arch Coal’s share price is $15.39 in a 52-week range of $13.09-$36.99. The consensus price target is $22, for a potential upside of about 43%.

Market Vectors Coal ETF (NYSE: KOL) is down 0.4% at $37.17 and is 52-week trading range is $27.42 to $51.87.

Share price highs for all the coal miners is down by -24% to -64%, with Consol down the least and Patriot down the most. Our pick from among these would have to be Peabody, primarily for its strength overseas. The others are either closing shafts or soon will be.

The boom in shale gas production not only weighs down natural gas prices, but will continue to weigh on coal prices. About the only thing that can help here, is lower natural gas production, and that may be starting to happen.

Paul Ausick

In addition to its struggles with a weak economy, the coal industry is almost continuously fighting rear-guard battles against environmentalists and regulators. The industry, or at least some of its players, have earned the scrutiny following deadly mine explosions and for continuing the widely denounced mining practice known as mountaintop removal. The US Environmental Protection Agency tried to rein in mountaintop removal mining by invoking provisions in the Clean Water Act. In a court ruling yesterday, the industry won a victory over the EPA when the judge ruled that the agency had exceeded its enforcement authority by failing to go through the formal rulemaking process before promulgating the restrictions on mountaintop removal.

The suit was filed by the National Mining Association, an mining industry group that includes large coal miners like Arch Coal Inc. (NYSE: ACI), Alpha Natural Resources Inc. (NYSE: ANR), Peabody Energy Corp. (NYSE: BTU), Cliffs Natural Resources Inc. (NYSE: CLF), Consol Energy Inc. (NYSE: CNX), and Patriot Coal Corp. (NYSE: PCX). The court ruling is expected to remove restrictions on more than 70 mining permits that were holding up projects in Appalachia.

The EPA pointed out that the ruling is a procedural issue and that it does not affect the agency’s authority under the Clean Water Act. In fact, the EPA released in July its final guidance which replaced the interim guidance that the court ruled on yesterday.

This issue still has some time to go before it is finally played out, and coal miners will continue to struggle, but not because they can’t keep knocking the tops off Appalachian mountains. On Monday, Arch Coal revised its outlook for the 2011 fiscal year from EPS of $1.75-$2.15 to $1.00-$1.40. The company has lost production of metallurgical coal at one of its mines following a roof collapse. Several other miners have had similar problems producing the high-priced coal and that is sending mining companies back to Appalachian mines.

Typically, when production of coal is disrupted, the price of coal rises. That’s not happening this time as Australian shipments of coal are fast making up for the disruption to production following last year’s floods. And then there’s the overall weak economy, which cuts demand for energy even more.

Over the past year, all seven of the companies mentioned here have seen share prices drop from around -5% (Consol) to nearly -60% (Alpha). Whether the coal mining stocks are currently a great value or a looming value trap depends more the pace of recovery in the world’s economy than on winning a pyrrhic victory over the EPA. And today’s share price declines bear that out.

Shares of Arch Coal are down more than -2% at around noon today, at $15.44, in a 52-week range of $13.09-$36.99. Alpha’s shares are off -3.5%, at $18.49, in a 52-week range of $15.49-$68.05. Patriot shares are off more than -7.5%, at $9.28, in a 52-week range of $6.92-$29.20. The Market Vectors Coal ETF (NYSE: KOL) is up 0.3%, at $32.03, in a 52-week range of $27.42-$51.87.

Paul Ausick

If the rumor is true, the deal would be valued at $7.5 billion and it only highlights the value of coal for industry.  Walter Energy produces and exports metallurgical coal for the steel industry and its stock had been faltering considerably of late.  Disappointing earnings and management turmoil have been attributed to much of Walter’s woes so far this year.

What is interesting is that a Bloomberg report this morning quotes a fund manager saying that Anglo American is not a likely bidder.  Go figure.

Elsewhere in more general coal movers, Market Vectors Coal ETF (NYSE: KOL) is up almost 4% at $41.29.  CONSOL Energy Inc. (NYSE: CNX), valued at $10.3 billion, is up 4.6% at $45.62.  Peabody Energy Corp. (NYSE: BTU), valued at $13 billion, is up 4.8% at $47.85.  Alpha Natural Resources, Inc. (NYSE: ANR), valued at $7.3 billion, is up 7.2% at $32.42.

What is interesting is that Walter Energy’s earnings estimates are $10.47 EPS for 2011 and $12.45 EPS.  Coal companies usually trade with a sub-market P/E multiple.  Still, even if things flatten and the estimates in 2012 only match this year’s estimates then Walter trades at about 8.4-times expected earnings.  It pays only 0.6% in dividend yields.

Even after an 18% pop to $88.69 after closing at $74.99 yesterday.  The 52-week trading range is $69.33 to $143.76.  As with all reports and rumors, none are gospel until a deal is formally announced.

JON C. OGG

Two food companies showed modest gains: General Mills Inc. (NYSE: GIS) and YUM! Brands Inc. (NYSE: YUM). And, two retailer moved higher, but with little conviction: Kohl’s Corp (NYSE: KSS) and Safeway Inc (NYSE: SWI)

AEGON N.V. (NYSE: AEG) maintained “Buy” but removed from Conviction Buy List at Goldman Sachs.
Alcoa Inc. (NYSE: AA) Started as Outperform with $20 target at Credit Suisse.
Agrium Inc. (NYSE: AGU) Reiterated Buy as Value at Zacks.
Ardea Biosciences Inc. (NASDAQ: RDEA) Raised to Outperform as Bull of the Day at Zacks.
CenturyLink Inc. (NYSE: CTL) Cut to Underperform as Bear of the Day at Zacks.
Cerner Corporation (NASDAQ: CERN) Added to Conviction Buy List at Goldman Sachs.
ConocoPhillips (NYSE: COP) Reiterated Buy at Argus.
CONSOL Energy Inc. (NYSE: CNX) Started as Outperform with $62 target at Credit Suisse.
Diamond Foods, Inc. (NASDAQ: DMND) Cut to Hold at Deutsche Bank.
Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) Started as Buy at BofA/ML; Started as Outperform at Credit Suisse.
Google Inc. (NASDAQ: GOOG) Reinstated as Buy at Needham; Reiterated Buy with $800 target at Canaccord Genuity.
ICICI Bank Ltd. (NYSE: IBN) Cut to Neutral at Credit Suisse.
JPMorgan Chase & Co. (NYSE: JPM) Reiterated Hold at Argus.
Newmont Mining Corp. (NYSE: NEM) Started as Neutral with $65 target at Credit Suisse.
Peabody Energy Corp (NYSE: BTU) Started as Outperform at Credit Suisse.
Stillwater Mining Company (NYSE: SWC) Started as Outperform with $24 target on Focus List at Credit Suisse.
STMicroelectronics NV (NYSE: STM) Cut to Equal-Weight at Morgan Stanley.
Transocean Ltd. (NYSE: RIG) Raised to Buy at Jefferies.
Vical Inc. (NASDAQ: VICL) Reiterated Buy with $8 target at Canaccord Genuity.

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JON C. OGG

Goldman’s reading on the entire sector is that thermal coal, used to generate electricity and heat, would outperform metallurgical coal used in steel making. As if to underscore that point, Canada’s Teck Resources Inc. (NYSE: TCK) lowered its production guidance for the second quarter, citing higher costs and deferred shipments due to the Japanese earthquake and tsunami. Teck is among the world’s largest suppliers of the metallurgical (coking) coal used in steel making.

Teck expects unit mining costs  of $71-$76/metric ton in 2011. The company also lowered its estimated average selling price for metallurgical coal from $280-$290/metric ton to $270.

Goldman’s prediction for thermal coal is based on better demand from both China and the US as US exports rise and lower production in the US bring inventories down by the end of the year. US utilities signing contracts for 2012 are expected to be forced to pay more to guarantee supply.

The situation in China is more complicated. The country has been unable to produce enough electricity for months now, as continued drought has lowered river levels and reduced hydro-power generation.

Already high coal prices pose another problem because the government sets the rate at which utilities can sell electricity, and right now the government is more concerned about consumers than about utilities. Thus, it has forbidden utilities to raise rates and opted instead to ration power where it can.

Baker Hughes Inc. (NYSE: BHI) Reiterated Hold at Argus.
Biogen Idec Inc. (NASDAQ: BIIB) Raised to Buy at ISI Group.
Brocade Communications Systems, Inc. (NASDAQ: BRCD) Maintained Buy with $7.50 target at Canaccord Genuity.
Capital One Financial Corporation (NYSE: COF) Reiterated Sell at Argus.
Celestica Inc. (NYSE: CLS) Maintained Buy but cut target to $11 at Argus.
Cimarex Energy Co. (NYSE: XEC) Started as Buy at Canaccord Genuity.
CONSOL Energy Inc. (NYSE: CNX) Raised to Neutral at Goldman Sachs.
Ferrellgas Partners (NYSE: FGP) Maintained Underperform as Bear of the Day at Zacks.
The Fresh Market, Inc. (NASDAQ: TFM) Raised to Overweight at JPMorgan.
Intel Corporation (NASDAQ: INTC) Maintained Buy with $28 target at Gleacher.
Jiayuan.com International Ltd. (NASDAQ: DATE) Started as Outperform at Oppenheimer.
Kosmos Energy Ltd. (NYSE: KOS) Started as Outperform at Credit Suisse.
McKesson Corporation (NYSE: MCK) Raised to Outperform as Bull of the Day at Zacks.
Molycorp, Inc. (NYSE: MCP) Raised to Overweight at Piper Jaffray.
Patriot Coal Corporation (NYSE: PCX) Raised to Conviction Buy List at Goldman Sachs.
Patterson-UTI Energy Inc. (NASDAQ: PTEN) Covered as Value Stock at Zacks.
Peabody Energy Corporation (NYSE: BTU) Raised to Buy at Goldman Sachs.
P.F. Chang’s China Bistro, Inc. (NASDAQ: PFCB) Cut to Equal-weight at Morgan Stanley.

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JON C. OGG

When Alpha Natural Resources, Inc. (NYSE: ANR) acquired Massey Energy Co. (NYSE: MEE) at the end of January, Alpha paid about $8.5 billion for a company that had suffered a mine explosion that killed 29 miners and that had just fired its long-time CEO. The Alpha-Massey deal was no bargain, and that might have been what cooled Arch’s desire to jump into the M&A game.

Consolidation in the coal sector has been running pretty hot since the middle of last year. Walter Energy, Inc. (NYSE: WLT) paid about $3.3 billion for Canadian miner Western Coal Corp. in a deal that closed in early March. Mining giant Rio Tinto plc (NYSE: RIO) recently raised its stake in Australian coal miner Riversdale Mining Ltd. (OTC: RFLMF) to 72%.

There is also some speculation that Consol Energy Inc. (NYSE: CNX) could be looking to sell its metallurgical coal reserves in Australia to focus more on natural gas production in the Marcellus shale play. A possible buyer for those assets would be Peabody Energy Corp. (NYSE: BTU), which already has a substantial mining presence in Australia.

International Coal had been mentioned last year as a possible takeover target for Massey. That happened under the leadership of Massey’s former CEO who was struggling to keep the company independent. When he was fired, Massey’s acquisition by Alpha was just a matter of time.

And there sat International Coal, with a market cap then of around $1.7 billion. Paying a 30% premium, Arch could have bought the company then for about $2.2 million. Instead, Arch decided to dither around and pay $3.4 billion now. A fair part of the increase in International Coal’s market cap is the result of speculation for a takeover.

The next speculative targets will probably be Patriot Coal Corp. (NYSE: PCX) and James River Coal Co. (NASDAQ: JRCC). James River just completed its acquisition of privately held International Resource Partners, a West Virgina miner with metallurgical coal assets.

James River also recently failed to complete a tender offer for outstanding 9.375% senior notes due in 2012. The company instead will redeem the notes on June 1, 2011. James River’s market cap is around $800 million.

Patriot Coal’s market cap is about $2.3 billion, and it will certainly get some attention as a takeover. The company was spun-off from Peabody in 2007, and focused on domestic growth while Peabody started looking at international opportunities. Whether or not Peabody will want to bring Patriot back into the fold is questionable.

If Peabody passes on Patriot, perhaps an international buyer will turn up. US companies that are large enough to swallow Patriot are already busy digesting earlier deals. Of course Patriot could merge with another coal company, say James River. But that doesn’t make an awful lot of sense.

In any event, International Coal is up more than 30% today, having posted a new 52-week high of $14.46, just shy of the $14.60/share price offered by Arch. Arch shares are down fractionally. Patriot Coal is up nearly 7%, to $26.94, near the top of its 52-week range of $9.76-$29.20. James River is also up, more than 5%, to $24.50, within its 52-week range of $14.44-$25.12. The Market Vectors Coal ETF (NYSE: KOL) is up about 0.5%, to $51.22, close to its high in a 52-week range of $28.35-$51.87.

Paul Ausick

(11 MAR -17 MAR) Ticker Weekly Price Change (%) Close Price 17Mar11 Close Price 11Mar11 Market Cap($Mil) CONSOL Energy Inc. CNX 13.8 55.33 52.48 12517.7 Peabody Energy Corp BTU 11.1 70.12 69.35 18971.7 Range Resources Corp. RRC 10.9 53.81 50.58 8636.0 Southwestern Energy Co SWN 10.8 40.90 37.85 14223.1 First Solar Inc FSLR 10.2 154.00 146.57 13227.8 Cabot Oil & Gas Corp COG 9.4 48.17 46.30 5023.0 GameStop Corp. GME 6.1 20.98 20.05 3176.3 Massey Energy Co MEE 5.9 63.15 65.33 6533.2 Freeport-McMoran Copper & Gold Inc. FCX 5.1 52.00 51.71 48922.2 Pioneer Natural Resources Co PXD 4.9 99.69 100.00 11609.1

Source:Capital IQ

CONSOL Energy (NYSE: CNX) rose sharply on the assumption that the need for coal would rise after the nuclear accident in Japan. Range Resources (NYSE: RRC) rose for the same reason

Peabody Energy (NYSE: BTU) said it will redeem its 5.875% senior notes due 2016 on April 15, 2011, using its cash balance.

First Solar (NASDAQ: FSLR) was among solar stocks which moved up because of technology advances in the industry. The firm also said it would expand as it builds a $300 million facility in Arizona.

Douglas A. McIntyre