Commodities & Metals

Mine Disaster Is Not Only Problem Facing Coal Industry (ACI, ANR, BKH, CNX, JRCC, MEE, BTU, KOL, MSA, D, CGX)

The coal sector has been rocked in the past two weeks by deadly accidents at mines in China and the US. In China, 32 miners are still missing and 6 are dead, and in the US, 25 miners are dead and 4 more are missing in an explosion at a West Virginia coal mine. Our sympathy goes out to the families of the dead, and our hopes go to the families of those miners still trapped below ground.

The US coal sector has experienced its share of ups and downs recently, as the global economy fitfully recovers from the recent recession. In this article, we review how US coal company shares are doing and what may lie ahead for the rest of 2010. Companies in this review include Arch Coal, Inc. (NYSE: ACI), Alpha Natural Resources (NYSE: ANR), Black Hills (NYSE: BKH), Consol Energy (NYSE: CNX), James River Coal (NASDAQ: JRCC), Massey Energy (NYSE: MEE), and Peabody Energy (NYSE: BTU). We’ll also look at the Market Vectors Coal ETF (NYSE: KOL) and a few of its components that aren’t included among the other companies we’re reviewing.  Mine Safety Appliances Co. (NYSE: MSA) even has some skin in the game.

Massey Energy shares have dropped nearly 16% in the two days since the explosion at its West Virginia mine. It’s 52-week trading range is $10.58-$54.80, and it’s trading has stabilized today at right around $46/share. The stock’s 200-day moving average is up about 15.5%, not including today’s drop of more than $2/share so far. Massey’s market cap is about $4.4 billion.

Massey had a lackluster 2009 fourth quarter, but the full-year results were better than 2008. The company projected flat shipments for 2010 but at slightly higher prices than previously estimated. Shipments in 2011 are expected to be about 8% better than 2010 and the average price per ton is also expected to rise. JP Morgan dropped its rating from ‘Overweight’ to ‘Neutral’ in early February, joining most other analysts’ ratings.

Following the disaster in West Virginia, Massey may not even be able to hold on to middling ratings. In its 2009 Form 10-K, the company noted that it does not carry business interruption insurance for the about 1.5 million tons of coal it will not be producing.

Arch Coal shares have jumped about 13% since the beginning of the year. The stock’s 52-week trading range is $12.52-$28.34, and its 200 day moving average is up more than 10%. Arch’s market cap is about $4.14 billion. The company’s shares are up today as traders expect Arch to get a share of Massey’s lost production.

Arch’s fourth quarter 2009 were much like Massey’s, with revenues off slightly and fully diluted EPS also down after excluding one-time items. For 2009, revenues were down more than $400 million and EPS down 89%. The company was looking ahead to economic recovery in 2010 and offered guidance on GAAP EPS in the range of $0.37-$0.86. Following the earnings release, two analysts raised ratings and two lowered them. Sounds about right.

Alpha Natural Resources, with a market cap of $6.52 billion, has been trading in a 52-week range of $15.95-$55.70. The wide span is mostly the result of the closing of its acquisition of Foundation Coal in July 2009. The shares set the 52-week high yesterday, again as a result of the explosion at the Massey mine. The 200-day moving average on the stock is up a bit more than 26%.

Alpha’s fourth quarter and full-year 2009 results were the best in the sector, and its outlook for 2010 was positive both for shipments of thermal and metallurgical coal. Goldman Sachs has Alpha listed on its ‘Conviction Buy List’, and that is probably where it deserves to be.

Peabody Energy is the largest of the US coal miners, with a market cap of $12.67 billion. It’s 52-week trading range is $23.56-$52.14 and the stock’s 200-day moving average is up 6.13%. Shares are trading up more than 2% today, due both to the Massey mine explosion and to the rejection of Peabody’s $3.3 billion bid for Australian coal miner Macarthur.

Fourth quarter 2009 revenues were off about 6.8% sequentially and nearly 18% from the same period in 2008. Shipments were down about 4% sequentially and 11.7% year-over-year. Peabody expects its Australian operations to ship 26-28 million tons of coal to Asian markets this year, up from 23.3 million tons in 2009. Prices are also expected to increase beginning the second quarter of 2010, when annual contracts come up for renewal. Peabody’s ratings lean toward the buy side, and that’s as it should be given its position in Australia.

Consol Energy is the second largest coal company in the US with a market cap of $10.03 billion. The company’s 52-week trading range is $24.01-$58, and its 200-day moving average is down 5.59%. Shares are down more than 1% today, not on any particular news, just general ennui about the company.

Consol issued more than 44 million new shares last week to help fund its acquisition of the Appalachian oil and gas assets of Dominion Resources (NYSE: D), which it will buy for $3.475 billion. The company also fell victim to a lawsuit by shareholders disgruntled at its $363 million offer to buy the assets of CNX Gas Corp. (NYSE: CXG) that Consol does not already own. The suit alleges that the price is too low. Consol has also issued two new debt offerings totalling $2.75 billion at 8% and 8.25% interest. New debt, a shareholder suit, and a share dilution keep the shares tamped down some.

KOL, the Market Vectors Coal ETF, has been trading in a 52-week range of $14.77-$41.55. It’s 200-day moving average is up 13.9%, and shares are trading down slightly today at around $39. The fund’s return on net asset value since the beginning of the year is 4.4%.

Three Chinese coal companies account for about 20% of KOL’s assets. China Coal Energy, China Shenhua Energy, and Yanzhou Coal Mining (YZC) make up 7.73%, 7.67%, and 4.87% respectively of the fund. The largest single holding is Alpha Natural Resources, at 8.28%. Massey Energy is not among the fund’s top 10 holdings.

Mine Safety Appliances Co. (NYSE: MSA) makes health and safety products such as gas masks and detection systems. The company’s 52-week trading range is $21.08-$29.60, and it is currently trading up less than 1% on the day, at $28.66. Shares gained about 5% on yesterday’s opening, but have since given most of that back.  This may have been a ‘mining safety’ play before but it is diversified now.

The last mining disaster in the US occurred in 2007 at a coal mine in Utah that killed six miners and three rescue workers. Since 2000, 39 Americans have died in US mines. That is too many, to be sure, but in the same period a staggering total of 51,266 Chinese have been killed in coal mines. In many ways, the cost of coal is always too high.


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