Taking Stock of Massey's Options (MEE, BTU, CLF)

Last April’s mine explosion at the Upper Big Branch mine killed 29 miners in the worst coal mining disaster in 40 years. Massey Energy Co. (NYSE: MEE), the mine’s owner, has taken a beating ever since. The company’s shares have fallen around 40% from 52-week highs, and the company has also attracted pointed criticism from Congress, the President, and the press.

That’s why a report in The Wall Street Journal that the company is “exploring strategic alternatives, including a possible sale” should be no big surprise. In mid-September, Massey released new guidance for the rest of 2010 and 2011. The company said it expected to report an operating loss for the third quarter and that it expected full-year operating results to be at the low end of its projected range.

Massey expects to ship about 39 million tons of coal at an average price of $71/ton. The company’s cash cost per ton is expected to be around $60. For 2011, the company reiterated its previous guidance that it would ship 45-51 million tons at $82-$86/ton at a cash cost per ton of $57-$61.

The company’s market cap is about $3.6 billion and revenue for the trailing 12 months is about $2.72 billion. Revenue estimates for the full-year 2010 amount to $3.23 billion. Though not as large as other US miners like Peabody Energy Corp. (NYSE: BTU), market cap of $13.9 billion, or Cliffs Natural Resources Inc. (NYSE: CLF), market cap of $9.1 billion, Massey’s Appalachian mines produce highly-valued metallurgical coal that sells for a premium price compared with thermal coal.

The WSJ story is attributed to “people familiar with the matter” and states that the company’s board has formed a committee to conduct the review. One person is quoted as saying that Massey could “be in due diligence with one of the multiple options” by mid-November.

There are at least two ways to look at the story. One, Massey is trying to do something to pump up its share price. If that’s the case, the plan is working: shares are up more than 8.5% at market opening this morning.

The other possibility is that the board is trying to come up with a way to force out CEO Don Blankenship, known as much for his combativeness as his managerial ability. Blankenship would like to keep the company private, naturally, so he could keep his job. Virtually any other scenario would likely see Blankenship leaving the company.

Last week we gave a full coal sector earnings preview to see if the massive run-up in many names can continue.

Paul Ausick