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Coal bull is back

We are into the second half of the second month of 2009 and pressure on coal prices have not eased. While the long-term outlook in this sector remains strong, thanks to strong fundamentals, spot prices continue to be under pressure. The reasons are being cited as high utility coal inventories, lower demand for electricity and competition from natural gas.

A statement by the International Coal Group (NYSE:ICO) has voiced similar sentiments. The latter is a leading producer of coal in Northern and Central Appalachia and the Illinois Basin. Analysts say falling coal prices have prompted the idling of some mine operations, while companies have decided to curtail production.

They point out that the time is also ripe for some big fish to gobble up small producers who cannot sustain themselves in such weak conditions. A hint of this came through when Chairman and Chief Executive Officer of Arch Coal Inc (NYSE:ACI) Steven Leer spoke to analysts after declaring his company’s fourth quarter results on the last day of January. He said that with a strong balance sheet, it was now a good time for Arch to make acquisitions. “Given the decline in pricing of assets we have seen, we are actively looking and see opportunities out there.”

On Thursday, though, most of the coal mining companies closed at a high on the New York Stock Exchange (NYSE), except for a few like ICG. This international coal producer had declared its results for 2008 on February 11, reporting a net loss of $24.7 million, or $0.16 per share on a diluted basis, against a net loss of $147.0 million, or $0.97 per share on a diluted basis, in 2007. The company’s 2008 and 2007 results include non-cash charges totaling $37.4 million and $170.4 million,respectively, related to the impairment of goodwill and non-recoverable mine development costs. Revenues for the year ended December 31, 2008, though showed an increase, totalling $1.1 billion, compared to $849.2 million for the year ended December 31, 2007.

ICG’s results come in the wake of Arch Coal declaring in the previous week-end, a slump in its fourth-quarter profit by 23.5 per cent, blaming falling coal prices that prompted the idling of some mine operations. Like other companies in this sector, ACI has now lowered production targets for 2009. The coal miner, one of the top four U.S. coal producers, also reduced its capital spending budget and said it expects a weaker coal market in 2009, although it remains bullish on the longer-term outlook for the industry.

Reuters quoted analyst Jeremy Sussman, of Natixis Bleichroeder, as saying that although the quarterly results beat Wall Street estimates, they were overshadowed by the cut in estimated coal sales for 2009 by perhaps more than 10 per cent. “We view the quarter as a slight negative, given the magnitude of the lower sales outlook. Lower production by as much as 16 million tons is enough for people to reduce (earnings) estimates.”

“We are approaching 2009 with a cautious view of the current global and domestic economic challenges,” Chairman Steven Leer said in a statement. “We are taking specific actions to address such challenges. A lot of companies are stressed in the credit markets or with permitting (acquiring mine permits), and historically it’s in the distressed market that we have acquired our best assets,” he said.

Leer also said Arch was looking to expand its exports to Asia in the next few years from Pacific ports, even though he saw U.S. exports industry-wide declining this year while the recession stunts steel manufacture and electricity generation — the two main uses for coal. 

The Asian markets are sure to be watched keenly this year. China, India and others are expected to continue to pursue unabated coal consumption, as coal is in vast demands in these regions. Meanwhile, China’s top economic planning agency has proposed a 5-8 per cent price rise for annual coal supply contracts this year, the official China Securities Journal said.

Company news

Amidst news of target reductions comes some good news. BHP Billiton’s (BLT.L) South African coal subsidiary, one of the world’s largest coal exporters, will produce 34 million tonnes in 2009 compared to 48 million last year, according to a company official. BHP’s output is set to fall after the company sold its Optimum coal mine in a black economic empowerment (BEE) deal. BEE is a government-driven programme meant to include blacks in the mainstream economy after years of exclusion under apartheid.

“The forecast for BHP’s (total) production in 2009 would be in the region of 34 million (tonnes),” Wilco Uys, BHP’s vice president for coal operations in South Africa told Reuters on the sidelines of a mining conference in Cape Town. Uys said BHP Billiton was on track to boost coal production by 2011 as it begins to reap the rewards of a $1.4 billion investment to upgrade sites in Africa’s strongest economy. BHP is the world’s biggest miner.

Disposal of interest 

U.K.’s Coal PLC has announced that its wholly-owned subsidiary, UK Coal Mining Limited, has completed the disposal of its 50 per cent interest in Coal4Energy Limited to its joint venture partner, Hargreaves Services PLC for a total cash consideration of £9.0 million, payable in full on completion.

Coal4Energy markets and sells domestic and industrial coal produced by the Group and coal supplied by Hargreaves. The net profit to the group from the disposal is estimated to be around £7.0m, and the proceeds will be used to reduce borrowings and fund investment. The disposal is not expected to have a significant impact on the group’s operations.

UK Coal Mining Limited has also today agreed to continue supplying circa 250,000 tonnes per annum of certain coals for the domestic and industrial market to Coal4Energy Limited under a new exclusive, five year supply agreement. The estimated book value of the gross assets of Coal4Energy on completion is approximately £19.0 million of which the group’s 50 per cent share is approximately £9.5 million.

Proceed with caution

A longtime U.S. congressional critic of the oil and gas industry said that there may be a place for expanded offshore drilling and a long future for coal in the U.S., but only with caution and a lot of investment.

Rep. Edward Markey, D-Mass., told an energy industry gathering in Houston at the start of the week, that he saw the recent surge of new power projects fuelled by natural gas and renewable sources like wind, a very good partnership for the future. But he conceded renewables can go it alone.

“I think we can find areas of the Outer Continental Shelf that are acceptable for drilling, but we need to protect our most sensitive areas,” said Markey. He declined to identify specific areas he considered acceptable. Markey said he could also see a significant role for coal, noting that coal accounts for half of the country’s electric power.

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