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

Met coal currently commands a contract price of about $285/metric ton. The spot price for Australian met coal is around $250/metric ton, a -20% drop in just three months. That indicates that the contract price will fall as well, and probably below the spot price. Platt’s has quoted a broker who has projected prices of $235/metric ton in the first quarter of 2012, falling to $205/metric ton by the end of the year.

The lower pricing is the result of an anticipated slowdown in the global economy, particularly in China which has experienced a construction boom in the past few years. But tighter government restrictions on lending and an over-supply of vacant buildings have resulted in fewer construction projects.

Still, there remains speculation that other coal companies may be takeover targets. We noted a rumor in early September that British miner Anglo American PLC (OTC: AAUKY) may be preparing a bid for Walter Energy. Last week, BHP Billiton plc (NYSE: BHP) was said to be considering a $6 billion offer for Walter Energy, with Brazilian giant Vale SA (NYSE: VALE) also included in the mix.

Like many commodities stocks, Walter Energy’s share price plunge in early August, and posted a 52-week low of $57.62. Shares have recovered to over $75, but that’s still about 50% off the stock’s 52-week high. If a takeover offer is coming, now is probably a good time.

US miner Patriot Coal Corp. (NYSE: PCX) has been boosting its production of met coal, and the company has said it sees strong demand for the steel-making coal continuing from Brazil and India. Patriot’s share price is about 67% below its 52-week high, making it another possible takeover target now that it’s market cap has fallen below $1 billion.

Peabody’s shares were up more than 3% at this morning’s opening, at $39.39, in a 52-week range of $30.60-$73.95. ArcelorMittal’s shares were also up more than 3%, at $18.72, in a 52-week range of $14.77-$38.88. The Market Vectors Coal ETF (NYSE: KOL) is unchanged, at $35.14, in a 52-week range of $27.42-$51.87.

The elephant in the room that no one wants to acknowledge is that if the stronger coal players are using the recent weakness to acquire the weaker players, perhaps these companies are positioning themselves better for the next decade and beyond.  Coal demand is a often considered as a leading indicator because it is still used as a key measurement for power consumption and for building infrastructure equipment and structures.  As with many businesses in and around commodities, getting better scale and better geography can incrementally lower costs and that drives higher margins.   Coal players seem to be positioning themselves for far beyond the next few years.

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

Alpha Natural Resources has cut its 2011 coal shipment targets down to 102.5 to 109.5 million tons from a prior range of 104 to 112 million tons. Lower metallurgical coal exports to Asia are forcing it to cut production at some of its domestic coal mines.  The company is also reviewing its 2012 estimates as well with global market conditions and it will adjust the 2012 at its next earnings report.

Walter Energy’s lower guidance is due to adverse weather conditions at its Alabama mining site and in its northeast British Columbia site.  Walter now sees earnings of $1.00 to $1.16 EPS for the current quarter and sees $2.63 to $2.95 EPS next quarter.  Thomson Reuters had estimates of $3.23 EPS this quarter and $3.16 EPS next quarter.  Metallurgical coal sales guidance was cut for the second half of 2011 to 5.2 million metric tonnes from a prior target of 5.9 million metric tonnes.

Patriot Coal Corporation (NYSE: PCX), Arch Coal Inc. (NYSE: ACI), and James River Coal Co. (NASDAQ: JRCC) are all getting hit hard: Patriot is down 6.5% at $10.66 and the new 52-week range is $10.35 to $29.20; Arch Coal is down 6.4% at $16.85 and the new 52-week trading range is $16.70 to $36.99; James River is down 5.6% at $8,55 and the new 52-week range is $8.48 to $27.06.  Alpha is down over 7% at $25.07 and the new 52-week range is $23.90 to $68.05 with that low being seen today.  Walter is down over 10% at $66.93 and the new 52-week range is $63.88 to $143.76.

Oddly enough, Yanzhou Coal Mining Co. Ltd. (NYSE: YZC), a steam coal and metallurgical coal player in China, is only down 1.2% at $25.37 and the 52-week trading range is $21.70 to $41.89.

The Market Vectors Coal ETF (NYSE: KOL) is also down ‘only’ 2.4% at $35.88 and its 52-week trading range is $35.73 to $51.87.

Weather is one thing, but a slowing demand out of Asia is another issue.  The world is hoping that growth in Asia can remain high enough that the U.S. and Europe can still avoid a recession or that they can limit the impact of a new recession.  Too much time has passed for there to be a true double-dip recession, but a new poll suggests that 80% of America feels like the recession never even ended.

In copper, a leading indicator, Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX), also suffering from a strike in Indonesia, is down 6.2% at $36.14 and its new 52-week range is $36.12 to $61.35.  It almost seems odd that the iPath DJ-UBS Copper TR Sub-Index ETN (NYSE: JJC) is up 0.6% at $48.38 on the day.

JON C. OGG

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

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.

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

In each case, we have identified stock performance, some color on each company, relative value metrics, and more in a very simple format.  All can easily be hedged with options.  Most important is that there is an element in each of these that may appeal to other types of investors other than just ‘value investors.’  We tried to pick apart silver, rare earth elements, lithium, and others, but in most cases these stocks are either up massively or they are not US-based.

Cloud Peak Energy Inc. (NYSE: CLD) is far from a household name and many investors consider the Montana and Wyoming coal producer a new company that came public in late-2009.  It is actually a special situation as it was formerly a unit of Rio Tinto and its coal is aimed mostly for electric power plants.  Many investors prefer sexier coal plays, but the low dollar value of the company at $1.3 billion is small enough that any of the larger players wanting a Western U.S. presence could decide that Cloud Peak needs to be acquired. 

While many coal companies trade with relatively low P/E ratios, this one trades at less than 10-times a blended 2011-2012 earnings model.  There is currently no dividend but that may change in the near future.  Some investors shy away from carve-outs and spin-offs, but we love being able to evaluate these special situations before and after the dust settles.  At $21.75, the 52-week trading range is $12.82 to $24.69; Analysts are currently very mixed too on Cloud Peak but Thomson Reuters has a mean consensus price target objective above $26.00 with an implied upside of 20% in the next year.  The stock has also lagged the Market Vectors Coal ETF (NYSE: KOL) in the run of the last 3 months and 6 months.

Mosaic Co. (NYSE: MOS) may be less followed than Potash Corp. of Saskatchewan (NYSE: POT) and it may not have been the subject of a broken buyout, but its valuation speaks for itself.  The crop nutrient player is in phosphates and potash in a field with fewer and fewer key players as more of the world is trying to eat more each day.  It is also riddled with a huge share overhang for an investor concern as Cargill holders may soon be unloading more than one-third of the company as it divests itself of the majority stake.  This giant stake sale has likely acted as a drag and an overhang on shares despite its performance.

Mosaic is guilty of the same low dividend yields as other agriculture and commodity players with a paltry 0.3% yield, but that $0.05 per quarter payout has been the same since 2008 and could easily be raised ahead. This one trades at about 16-times a blended 2011-2012 earnings model and has a market cap of $35 billion. At $78.41, its 52-week trading range is $37.68 to $89.24. Mosaic shares actually hit above $150 at the peak of the 2008 Ag-Bubble. Thomson Reuters has a mean consensus price target of about $87.00, implying close to 11% upside.

Nuclear related shares are getting pounded now as politicians and activist groups are calling for a significantly geared down approach to nuclear approach now.  So who wins?  Think solar.  Solar power plants melting down only causes black goo on the ground.  Coal… who cares if it is dirty at this point compared to nuclear fallout.  Wind and other alternative energy… Same for solar.  Natural gas is back… Many power plants run on this, and if nuclear power gets curbed too much ahead then natural gas is going to benefit just like coal does.  Here are eight ETFs that are trading higher as a direct result of the Japan quake knocking out the nuclear sector.  Oh year, a “Short Japan Fund”…

Market Vectors Coal ETF (NYSE: KOL) is up 1.75% at $47.01 against a 52-week range of $28.35 to $49.80.

Guggenheim Solar (NYSE: TAN) is up 6.3% at $7.83 against a 52-week trading range of $6.02 to $9.34. There is also the  Market Vectors Solar Energy ETF (NYSE: KWT) up 7.1% at $12.39 against a 52-week trading range of $9.04 to $14.33. PowerShares WilderHill Clean Energy (NYSE: PBW) is up 0.9% at $10.00 against a 52-week range of $4.00 (low from Flash Crash) to $11.42.

ProShares UltraShort MSCI Japan (NYSE: EWV) is up a whopping 15.6% at $39.30 against a 52-week range of $29.83 to $52.78… This one is 200% the inverse of the daily performance of the MSCI Japan Index.

United States Natural Gas (NYSE: UNG) is now up only 0.25% at $10.42 but this one was up as high as $10.78 earlier today.  The iPath DJ-UBS Natural Gas TR Sub-Index ETN (NYSE: GAZ) is also now ‘only’ up 0.57% at $7.09 but it was up as high as $7.31 earlier today.  Finally, the Teucrium Natural Gas ETV (NYSE: NAGS) is still up 3.1% at $22.97 but this one has extremely thin trading volume. 

Japan is one of those situations that is unfolding as a tragedy and it will have an impact on GDP ahead.  These are just the financial winners in exchange-traded products as far as what the stock market vote is today.

JON C. OGG

Arch posted EPS of $0.29 on revenue of $835.4 million, compared with analysts’ expectation of EPS of $0.43 on revenue of $850.4 million. The company blamed “lower-than-expected shipment levels, poor Eastern rail service and [expected] lower-than-planned production” at one of its mines. Larger rival Peabody Energy (NYSE: BTU) posted better-than-expected results earlier this week.

In its earnings release, Peabody said that it believes the world is entering the early stages of “a long-term supercycle for coal” as demand from Asia, particularly China and India, picks up. Following is a table of the upside estimates for Arch, Peabody, Massey Energy Corp. (NYSE: MEE), International Coal Group, Inc. (NYSE: ICO), Patriot Coal Corp. (NYSE: PCX), and Consol Energy Inc. (NYSE: CNX).

The low upside at Massey is probably due to the recent change in leadership, as well as lingering questions about liability from the explosion last year at the company’s Upper Big Branch mine that killed 29 miners. The negative upside at Patriot probably doesn’t reflect three positive ratings on the stock in the last three weeks.

The very high upside at International likely reflects both the company’s operations and the talk that it will be acquired by Massey. Patriot has also been mentioned as a takeover target for Massey. International’s market cap is about $1.7 billion and Patriot’s is about $2.2 billion, compared with Massey’s $5.5 billion. A deal for either one is not out of the question.

The upsides for Arch, Peabody, and Consol are all in the same ballpark, and that 18%-20% growth depends on the companies’ abilities to get more coal to Asia. Arch recently signed two deals to ship coal from its mines in the Powder River Basin from the West Coast. Peabody is also looking to acquire terminal space on the West Coast for its Wyoming and Montana coal production.

Along with increased production, higher prices will also contribute to growth in coal company stocks. Metallurgical coal spot prices have been as high as $350/metric ton, with Peabody reporting first quarter contract prices of $225/metric ton. Arch expects to sell 98 million tons of Powder River Basin thermal coal at a price of $13.52/ton, about $1.50/ton more than the 2010 price.

Increased production, higher prices, and a route to Asia are the keys for coal miner growth. Arch Coal shares are down about -3%, to $31.72, following their lackluster report. The Market Vectors Coal ETF (NYSE: KOL) is down more than -2.5%, to $45.28 at around noon.

Paul Ausick