Commodities & Metals

Can Coal Miners Meet Even Modest Earnings Expectations?

coal train
Source: Thinkstock
While prices have recovered a little since beginning the year to around $48.50 per ton for central Appalachian thermal coal, mining companies are receiving about $13 a ton less than the peak price of the past 12 months.

Internationally, the pricing regime for metallurgical coal used in steelmaking also has slipped and, perhaps worse, volumes are expected to drop sharply compared with 2014 shipments. Much of the downturn on met coal is due to lack of demand from China, where 2014 shipments fell more than 17% compared with 2013, and 2015 shipments may fall as much as another 23%, based on shipments to date this year.

In the United States, a milder winter and low natural gas prices have weighed on coal prices and production. The U.S. Energy Information Administration (EIA) projects coal production in 2015 of 926 million tons, down nearly 2% from 2014 production and the lowest annual total since 1987. The EIA also predicts that met coal exports will drop 22.5% in 2015 and that total coal exports will fall by more than 10% year over year.

The price of coal closed 2014 at $2.36 per million BTUs, and that is expected to fall to $2.31 this year. A ton of coal contains just over 20 million BTUs, so the average price per ton works out to around $46.20, more than $4.00 per ton below the current price for thermal coal.

What can we expect from U.S. coal miners as they report first-quarter earnings beginning next week?

CONSOL Energy Inc. (NYSE: CNX) is the largest U.S. coal miner measured by its market cap of $7.15 billion. CONSOL reports earnings on April 28 and is expected to post earnings per share (EPS) of $0.14 on revenues of $890.76 million. The EPS estimate is 72% lower than the prior year EPS of $0.50 and the revenue estimate is 8% lower. CONSOL’s forward price-to-earnings (P/E) ratio is 27.32, higher by far than any other coal miner. That is likely due to the company’s increasing focus on natural gas production, which currently accounts for about a third of the company’s sales. The stock’s 52-week trading range is $26.11 to $48.30, and it closed on Thursday at $31.14. The consensus price target from 21 brokers is $37.26.

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Alliance Resource Partners L.P. (NASDAQ: ARLP) is the country’s second-largest coal miner, with a market cap of $2.43 billion. The company is also scheduled to report earnings on April 28, and analysts are expecting earnings per common unit of $0.99 on revenues of $594.84 million. In the first quarter a year ago, Alliance posted per-unit earnings of $1.10 on sales of $542.04 million. The company boosted its distribution to $0.65 per unit in the first quarter and now pays a dividend yield of 8%. The forward P/E ratio is just 7.82, and the 52-week range is $31.13 to $53.84. The units closed at $33.51 on Thursday, and the consensus price target is $48.25 from four brokers.

Peabody Energy Corp. (NYSE: BTU) reports first-quarter results on April 23. The company is the nation’s third-largest coal miner, with a market cap of $1.48 billion. The company has guided U.S. sales volumes for 2015 at 190 million to 200 million tons, and Australian volumes at 27 million to 29 million tons, which is about flat with 2014 volumes at the lower end of the estimated ranges. Analysts are expecting a first-quarter net loss of $0.32 a share on revenues of $1.61 billion. In the first quarter of last year, Peabody posted a net loss of $0.19 on sales of $1.63 billion. The company’s forward P/E ratio is negative, and the consensus price target of 19 brokers is $8.54. The stock’s 52-week range is $4.71 to $19.63, and shares closed most recently at $5.29.

Arch Coal Inc. (NYSE: ACI) reports results next Tuesday, April 21, and the company is expected to post a net loss of $0.48 per share on sales of $719.41 million. In the year-ago quarter, Arch posted a net loss of $0.60 per share on sales of $735.97 million. Shares closed at $1.06 on Thursday, in a 52-week range of $0.80 to $5.08. The forward P/E ratio is negative and the consensus price target is $1.59 from 14 brokers.

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We should note that Friday morning BB&T Capital Markets initiated coverage on Westmoreland Coal Co. (NASDAQ: WLB) with a Buy rating and a price target of $40. The consensus price target on the stock had been $41.67 from three brokers. Measured by market cap, Westmoreland is the fourth-largest U.S. coal miner, with a value of $526.7 million.

In addition to its mining operations, the company owns a 79% partnership interest and the general partner of Westmoreland Resource Partners L.P. (NYSE: WMLP). The Westmoreland operations primarily provide thermal coal to U.S. coal-fired power plants. The company is very lightly traded, with an average of just 4,720 shares of stock trading hands per day. The 52-week range is $5.86 to $13.34, and shares closed Thursday at $11.77. Analysts estimate the company will post a first-quarter net loss of $2.88 per share on sales of $51.20 million.