Adobe Systems (ADBE) Cut to Hold at Jefferies.
Barrick Gold (ABX) Started as Reduce at Nomura.
Coventry Health (CVH) Cut to Sell at Goldman Sachs.
Felcor Lodging (FCL) Started as Sell at Citigroup.
Martha Stewart (MSO) Cut to Underweight at JPMorgan.
Mirant (MIR) Cut to Sell at Citigroup.
Sprint Nextel (S) Cut to Market Weight at Thomas Weisel.
Verizon Communication (VZ) Cut to Neutral at UBS.

JON C. OGG

Cliffs will also offer 12 million new shares of common stock in a secondary offering underwritten by JP Morgan Securities and Merrill Lynch. The proceeds will be used for “general corporate purposes,” which might include ” funding certain capital expenditures, repayment of indebtedness or strategic transactions.” The stock offering increases the number of outstanding shares by about 10%. The underwriters have an over-allotment option of 1.8 million additional shares.

Less than a year ago, Cliffs was booming on the huge run-up in prices for iron ore, primarily from China. The bottom has fallen out of the market, and the company’s coal production is not big enough to carry the weight of the dividends, high salaries, etc. The company tried to bulk up by offering to buy Alpha Natural Resources, Inc. (NYSE:ANR) last year, but that deal fell apart when analysts and shareholders balked at the huge drop in value as the global economy tanked. Now that Alpha has purchased Foundation Coal, Inc. (NYSE:FCL), its market cap is roughly equal to Cliffs’.

It almost goes without saying that Cliffs is taking a beating in the pre-market this morning. Shares are off around 10%, at $25.98. The company’s 52-week range is $11.80-$121.95.

Paul Ausick
May 13, 2009

Abercrombie & Fitch (ANF) Raised to Buy at Jefferies.
Celanese (CE) Cut to Hold at Citigroup.
Flextronics (FLEX) Cuto Sell at Collins Stewart.
Foundation Coal (FCL) Cut to Hold at Jefferies.
Home Depot (HD) Raised to Buy at Citigroup.
Home Inns (HMIN) Raised to Outperform at Oppenheimer.
Lincoln National (LNC) Raised to Outperform at Wachovia.
Marathon Oil (MRO) Cut to Market Perform at Bernstein.
Overseas Shipholding (OSG) Cut to Perform at Oppenheimer.
Sonoco Products (SON) Cut to Hold at KeyBanc.

JON C. OGG

Just last November, Alpha’s proposed merger with Cliffs Natural Resources, Inc. (NYSE:CLF) was canceled because the value of the deal had dropped from about $10 billion in July to about $4 billion. That deal was never terribly popular with analysts or shareholders, primarily because demand for iron ore and coal had caused prices to rise to startling heights.

Foundation shares are up more than 40% in pre-market trading, to $30.30. The 52-week range is $8.53-$89.72. Alpha shares are also up nearly 2%, to $28.86. The 52-week range for Alpha is $13.93-$119.30. Market Vectors Coal ETF (NYSE:KOL) has also jumped nearly 11% this morning.

It seems that this deal is being viewed as a winner all around.

Paul Ausick
May 12, 2009

What’s taking the share price down is the company’s downward revisionof its guidance for the rest of 2008. The EPS forecast has been loweredfrom $2.50-$2.85 to $2.30-$2.55, primarily due to weaker demandresulting from the global economic slowdown. The company’s Appalachiancoal price jumped by 70%, from $46.41/ton to $78.95/ton. All told, Archsold 34.8 million tons of coal in the third quarter, up slightly from34.4 million tons in the same period a year ago, at an averageprice/ton of $20.38, up from $16.02 a year ago. Arch also doubled itsoperating margin per ton. Had it now lowered its guidance, this wouldhave been a stellar report in today’s environment.

For comparison, Foundation Coal (NYSE:FCL) reported a net loss lastweek, bringing the stock down about 80% from its 52-week high.Foundation had trouble shipping its northern and central Appalachiancoal, even though the average price per ton was up 20%. Like Arch,Foundation lowered guidance for the fourth quarter; unlike Arch,Foundation also reduced 2009 guidance.

In contrast, Peabody Energy (NYSE:BTU) raised its guidance for 2008,but cautioned that coal exports would be critical to reaching its newannual EPS target of $3.00-$3.25. Peabody also announced last Fridaythat it was doubling its stock buyback program to a new total of $1billion.

But these days, balance sheets tell the story. Peabody is sitting on$104 million in cash. Foundation holds about $24 million in cash, andArch $41 million. Property, plant, and equipment grew only slightly atArch and Peabody, while they fell at Foundation. Long-term debt at allthree companies is relatively modest, and declining a bit.

The weak global economy brings energy companies face-to-face withsoftening demand, lower prices, and increased costs. If this soundsfamiliar, it’s because coal miners are in the same boat with oil andnatural gas companies. The assets may be huge, but they’re only worthwhat someone will pay for them. And right now, investors are onlyinterested in one asset–their own cash.

Paul Ausick
October 27, 2008

Just over a month ago, we noted the declines in coal stocks, and the situation has not improved. The biggest loser since then has been Massey (NYSE:MEE), down 40%, followed by Foundation Coal (NYSE:FCL), off 37%. Arch Coal (NYSE:ACI), Peabody (NYSE:BTU), James River (NASDAQ:JRCC), and CONSOL are down 22%-28%.

One could argue that coal stocks tracked crude oil prices up, and thendown. And again, like crude, coal stocks got a bailout bump early thisweek. But that didn’t last, and it’s not likely to come back.  Now, thehopes are for "value calls" from analysts and investors.

Coal prices have flattened. According the US Energy Information Agency,Central Appalachian coal has remained at $140/ton since August 29th.Illinois Basin coal has dropped from $93/ton to $84/ton, Powder RiverBasin and Uinta Basin coal are essentially flat at a current price of$11.25/ton and $61.00, respectively. Prices will probably move up aswinter approaches, but recessionary worries and a slowing economy won’thelp bolster prices. Finally, operating expenses for all thesecompanies are sure to increase unless the miners reduce production. Andif they reduce production, well, there go profits.

CONSOL’s news has caused the company’s stock to drop by more than$4/share (about 8%)  in early trading. All the other mining stocks arealso down, with James River down the most (about $3/share, or 9%) onits announcement of its intention to sell 1.5 million new shares ofstock. There’s no good news coming from the mines today.

Paul Ausick
September 24, 2008

The last month and a half have cost shareholders in these companiessome significant money even if you factor in today’s pop. And thattrend looks like it could continue if energy prices don’t keep rising.Foundation’s PE ratio for the trailing twelve months is a whopping210.51, and its forward PE is 10.09. The other four are not asdramatic, with current PE ratios around 50 and forward PE ratios alsoaround 10.

Is coal really the next dot.com?  Not likely, but that doesn’t meanthat the coal companies don’t have some problems. Foundation actuallyreported a net loss of $4.4 million for the second quarter of 2008,even though prices were higher in every region. The company’s bigproblem came from the Powder River Basin of Wyoming, where 68% ofFoundation’s coal was produced. The average price per ton of PRB coalwas $10.05, less than half the company’s overall average of $23.82,which included Appalachian and Illinois coal that is priced four to sixtimes higher per ton.

Costs and capital expenses are going to hit coal companies with a largepercentage of assets in the Powder River Basin. Rail lines to carry thecoal to east and west coast markets are critical to continuing growth.Just recall the situation this past spring when Midwest floodingessentially stranded PRB coal from eastern markets.

Demand for coal will not decrease. After all, nearly 50% of USelectricity is generated from coal-burning power plants, and demand forelectricity is growing quickly. But coal companies also have to facetightening emissions standards which make natural gas and renewableslike wind and solar more attractive. Even nuclear power generation mayre-enter the competitive picture. Current valuations of coal companieswill very likely continue to fall, but over the medium term, nothing isgoing to replace coal and that fact alone should keep coal burningbright.

Even with coal stock gains pushing up the Market Vectors Coal ETF (NYSE: KOL), you can do a glass half-full or half-empty argument.  The ETF is up over 3% this morning at $45.50, which is down roughly 25% from the $60.30 high and up almost 40% from its lows of $32.59. When you consider that this ETF just launched in January of 2008 and we are only in August, you realize that volatility is this dirty commodity’s middle name.  With the volatility of coal prices being so high and with some companies hedged and others unhedged, pick your coal stocks carefully.

Paul Ausick
August 21, 2008

• Anglo American (AAUK) Raised to Strong Buy at S&P (late Weds. call).
• Arch Coal (ACI) Raised to Buy at UBS.
• BB&T Corp. (BBT) Raised to Buy at S&P.
• Central European Media (CETV) Raised to Buy at Citigroup.
• Foundation Coal (FCL) Raised to Buy at UBS.
• Jack Henry (JKHY) Cut to Hold at Needham; Cut to Neutral at D.A. Davidson.
• Massee Energy (MEE) Raised to Buy at UBS.
• WellCare Group (WCG) Started as Buy at B of A.

Jon C. Ogg
August 21, 2008

Arch, which gets about 72% of its production from Wyoming’s PowderRiver Basin, could have done even better had it not had to cope withweather-related problems in moving its coal across the flooded Midwest.Both Foundation and Peabody experienced the same problems.

The big problem for every producer is operating costs. Peabody’s USoperating costs were nearly $3/ton higher in the second quarter a yearago. Foundation didn’t break out its costs per ton, but it’s total costof sales increased from $288.1 million in the second quarter of 2007 to$328.9 million this year. For the first six months of 2008,Foundation’s cost of sales are $72 million higher than a year ago.Arch’s operating cost per ton for the 2008 second quarter was $10.44,more than $1.00/ton more than a year ago.

According to Arch, the increase in operating costs were due to "reducedvolumes as well as higher commodity-related and sales-sensitive costs."In other words, energy costs to run the operation are starting to hurtus. Higher fuel costs affect coal producers just as they affectcommuters. And the depressed pricing of Powder River Basin coal isrelated to the distance that the coal has to travel to market. The morefuel needed to transport the coal, the bigger bite out of margins.

Paul Ausick
July 25, 2008

On Tuesday, Arch Coal (NYSE:ACI) announced a 22% increase over 2007 in first quarter revenue to $699.4 million, and EPS of $0.56, compared with $0.20 in 2007. The company raised its guidance for 2008 EBITDA to $745 – $845 million, and its EPS expectations to $2.40 – $2.80. That gave back the industry’s previous day’s gain.

But… Maybe not all good things run in three’s.  Today, Foundation Coal (NYSE:FCL) announced a clear miss on its report of $0.13 EPS, and excluding items the number was $0.19 EPS. While this was down from $0.53 last year, First Call estimates were $0.32 EPS. Revenue of $406.9 million exceeded estimates averaging $403.49 million, and improved on 2007 first quarter revenue of $386.2 million. The company did not change its guidance for the remainder of 2008.

Foundation’s net income for the first quarter of 2008 totaled $6.1 million, compared with $24.6 million a year ago. What happened? Higher diesel fuel costs, higher royalty payments, and higher labor costs accounted for a $17 million increase in the cost of sales. Another $14 million was attributed to a botched arbitrage transaction in which FCL had to buy about 300,000 tons of coal to meet existing commitments, expecting to sell new production on the spot market at a higher price. It didn’t work out that way.

FCL stock was down $1.64 in pre-open trading, and shares are down slightly more at $61.91 after 45 minutes of trading. Peabody has fallen by 3.7% to $66.01, and Arch (ACI) is down 1.5% at $58.15 so far. What goes up doesn’t always stay up.

What is evident is that the coal industry is not necessarily a series of unified parts.  Transportation costs can impact results, equipment shortages and accidents can impair companies, and we’ve even seen inability to transport materials out of the line affect coal shares in recent years.

To show how the overall sector is doing, the key ETF for the group is the Market Vectors Market Vectors Coal ETF (NYSE: KOL).  It has many international components in it, with five of the top ten components being outside the U.S.  To prove that, this ETF is actually UP by 0.5% at $45.50 on somewhat thin trading volume.  This ETF has just not yet caught on with investors.

Paul Ausick
April 23, 2008