Six Coal Stocks to Mine for Profits

Emerging economies are driving demand for coal. Here are six coal companies with upside to burn.
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NEW YORK (TheStreet) -- As the global economy shows signs of revival and industrial activity heats up, emerging-economies-driven demand for coal, especially metallurgical coal, is fueling it. Here are six coal stocks to mine for profits as they enter the next phrase of our economic boom-bust cycle....

Walter Energy

Earnings Date:

Apr. 28 (after the market close)

Consensus Estimate:

89 cents earnings per share

Fourth Quarter 2009 EPS:

62 cents earnings per share (5.1% outperformance of Street consensus of 59 cents)

50-Day Moving Average:

$91.33

Share Price Gain or Loss on Day of Last Earnings (Feb. 3):

-$1.19 (loss)

Lowest Share Price Since Last Earnings:

$63.6 (Feb. 5)

Highest Share Price Since Last Earnings:

$99.45 (Apr. 6)

Earnings Issues and Factors to Note:

Analysts are expecting a largely positive earnings report for

Walter Energy's

(WLT)

first quarter 2010 due to its predominant exposure to the metallurgical coal market -- widely expected to be a more profitable coal category to be in.

Walter Energy entered the quarter with significant un-priced met, but reports say the company is now pricing much of the met at $240 to $250 a ton -- a strong price point, according to BMO Capital Markets analyst Meredith Bandy. Thermal coal prices are currently much lower, ranging from $11.50 a ton to $50 a ton, according to S&P analyst Mathew Christy.

Still, concerns exist regarding Walter Energy's limited number of met coal mines. The company only has two, its "Number 4" and "Number 7" mines in Alabama; thus it's crucial to Walter that both can operate at full capacity, Bandy notes.

Walter Energy recently started Number 7 east mine expansion and "hopefully that will be running as planned," Bandy said. So far, the number 7 mine is producing according to planned.

Other factors to be focusing on when the company's first quarter earnings report comes out are tightness of the met market supply, as well as the replacement status of the CEO, CFO, and general consul at the company. Interims are currently in place in all three positions.

"There is a bit of a gap in the management ... does this make them more susceptible to a takeout?" Bandy asks, reflecting the thoughts of many investors. As Walter Energy nears its next earnings date, Bandy says she will be watching for how tight the met market supply has been following the Massey Upper Big Branch Coal mine accident in West Virginia.

Walter Energy on Thursday announced a 25% quarterly dividend increase to 12.5 cents per common share.

Massey Energy

Earnings Date:

Apr. 21 (after the market close)

First Quarter 2010 EPS:

39 cents earnings per share (39.3% outperformance of Street consensus of 28 cents)

50-Day Moving Average:

$48.53

Share Price Gain or Loss on Day of Last Earnings (Apr. 21):

17 cents (gain)

Lowest Share Price Since Last Earnings:

$41.30 (Apr. 22)

Highest Share Price Since Last Earnings:

$44.70 (Apr. 23)

Earnings Issues and Factors to Note:

For the past month,

Massey Energy

(MEE)

has been in the news for all the wrong reasons -- those reasons all stemming from the accident at the company's Upper Big Branch Coal mine in West Virginia.

And on Wednesday -- when Massey reported a decline in both earnings and revenue for the first quarter, while forecasting a range of loss of $80 million to $150 million for charges related to the benefits being provided to families of the fallen miners -- the company could offer little in the way of positives with which to change the conversation.

The report sounded grim and the stock plunged the morning after it was released. But analysts believe that hope lies ahead for Massey through its recently completed, $960 million acquisition of mine operator Cumberland Resources.

"The release itself has to be viewed somewhat negatively," BMO Capital Markets analyst Meredith Bandy said. "But I think at the end of the day the Cumberland acquisition is still a positive for the stock." She adds, "if you say that

the stock is down 10% to 15%, that's

the mining accident impact already priced into the stock. Much of it is already in the stock." Bandy is assuming that the mining accident will have little impact on met coal prices, for the sake of conservatism; but, in reality, pricing is already higher than it was before the accident.

Bandy notes that in the near term, the Cumberland acquisition should have a moderate effect for Massey; mostly just through bringing on already-priced thermal coal (which is not as profitable as met coal). But in the longer-term, the acquisition will allow Massey Energy to upgrade to coal that would be sold in the met market through 2011 and 2012. "It's going to be able to provide significant upside for years out," S&P analyst Mathew Christy agreed.

For the second quarter, Christy sees an estimated 12% increase in year-over-year Massey coal volumes per ton, which accounts for Cumberland. He also sees a slight uptick in overall average pricing, excluding the charges to be taken for the Upper Big Branch accident.

Operations are improving for everyone "as older contracts start to roll off and you see improved met coal pricing," Bandy said.

Alpha Natural Resources

Earnings Date:

May 5 (before market open)

Consensus Estimate:

55 cents earnings per share

Fourth Quarter 2009 EPS:

51 cents earnings per share (13.3% outperformance of Street consensus of 45 cents)

50-Day Moving Average:

$50.76

Share Price Gain or Loss on Day of Last Earnings (Feb. 9):

8 cents (gain)

Lowest Share Price Since Last Earnings:

$39.80 (Feb. 10)

Highest Share Price Since Last Earnings:

$55.70 (Apr. 6)

Earnings Issues and Factors to Note:

In July 2009,

Alpha Natural Resources

(ANR)

and Foundation Coal announced the completion of a merger, "creating one of America's foremost coal producers," Alpha Natural Resources said.

The new company retains the name Alpha Natural Resources and became, overnight, the third-largest coal producer in the U.S., with 2008 pro forma revenues of $4.2 billion. The implications are significant and impactful.

S&P, for its part, believes that the entity will have "significant operating scale," producing nearly 88 million tons of coal in 2010, followed by more than 91 million tons the next year. S&P analyst Mathew Christy estimates first quarter production of 22 million tons by Alpha Natural Resources at an average pricing of $38 per ton.

"That is higher than last year's figures because they had purchased Foundation Coal last year," Christy explained.

International Coal

Earnings Date:

Apr. 28 (after the market close)

Consensus Estimate:

1 cents earnings per share

Fourth Quarter 2009 EPS:

0 cents earnings per share (in line with Street consensus of 0 cents)

50-Day Moving Average:

$4.84

Share Price Gain or Loss on Day of Last Earnings (Jan. 28):

-4 cents (loss)

Lowest Share Price Since Last Earnings:

$3.36 (Feb. 5)

Highest Share Price Since Last Earnings:

$5.71 (Apr. 15)

Earnings Issues and Factors to Note:

During

International Coal's

(ICO)

first quarter 2010 earnings call, Morningstar analyst Michael Tian expects there to be much discussion of: 1) the potential for exports, 2) the potential to increase metallurgical coal production; 3) permitting trends -- "this has been a hot topic for ages now," Tian notes, and 4) negative productivity trends stemming from potential legislation or regulation following the Massey Upper Big Branch Coal mine accident in West Virginia.

"People are very nervous about cost pressures from this," Tian said. "The talk is a 5% or maybe even 10% loss in productivity -- as measured in tons per work hour-- in the coming years from increased regulation. This is bad for higher cost Appalachian miners like ICO."

Still, Tian notes two industry trends that point to a decent quarter for International Coal: fairly high metallurgical realizations to come, and the fact that costs seem to be under control so far -- though Tian adds that his data set is, thus far, small. All Central Appalachian coal companies are rushing to expand metallurgical production right now, according to Tian.

Natural Resource Partners

Earnings Date:

May 5 (after the market close)

Consensus Estimate:

28 cents earnings per share

Fourth Quarter 2009 EPS:

39 cents earnings per share (50% outperformance of Street consensus of 26 cents)

50-Day Moving Average:

$26.02

Share Price Gain or Loss on Day of Last Earnings (Feb. 11):

67 cents (gain)

Lowest Share Price Since Last Earnings:

$23.06 (Feb. 11)

Highest Share Price Since Last Earnings:

$27.56 (Mar. 17)

Earnings Issues and Factors to Note:

Natural Resource Partners

(NRP) - Get Report

is a limited partnership formed in April 2002, engaged primarily in the business of owning and managing coal properties in the three major coal-producing regions of the U.S.: Appalachia, the Illinois Basin and the Western U.S. As of December 31, 2009, Natural Resource Partners owned or controlled about 2.1 billion tons of proven and probable coal reserves.

Natural Resource Partners does not operate any mines, but leases coal reserves to experienced mine operators under long-term leases that grant the operators the right to mine the company's coal reserves in exchange for royalty payments.

"Based on the growth plans of the coal group, all of the lessees of NRP are ramping up their met coal production, which bodes well for NRP," FBR Capital Markets analyst David Khani said in an investor note. Khani also estimated 1.2 metric tons and 4.3 metric tons of production growth in 2010 and 2011, which he believes should contribute incremental royalty revenues.

Hilliard Lyons Equity Research analyst Joel Havard, for his part, believes that coal volume will begin to stabilize in 2010 after declining about 23% in 2009, thanks to the firming of metallurgical coal demand. However, he also believes that pricing will moderate to about 4% this year, compared to a rise of about 13% last year.

Patriot Coal

Earnings Date:

Apr. 23 (before market open)

First Quarter 2010 EPS:

-48 cents earnings per share (in line with Street consensus of -48 cents)

50-Day Moving Average:

$21.13

Share Price Gain or Loss on Day of Last Earnings (Apr 23):

$1.34 (gain)

Lowest Share Price Since Last Earnings:

$22.40 (Apr. 23)

Highest Share Price Since Last Earnings:

$23.87 (Apr. 23)

Earnings Issues and Factors to Note:

On Apr. 23,

Patriot Coal

(PCX)

reported first quarter net income of $4.261 million, or 5 cents a share, down from $32.143 million, or 41 cents a share the year before. Adjusted earnings was a loss of 48 cents a share, adjusting for net gain on asset exchange and sales contract accretion, in line with the consensus estimate of a loss of 48 a cents a share.

"The changes we made in 2008 and 2009 to idle certain operations, redeploy capital and re-tool mine plans are paying off as we realize benefits from our stronger mine portfolio," Patriot chief Richard Whiting said in a written statement. Revenues for the quarter were $467.3 million, down from $528.9 million in the prior year, missing analysts' average estimate of $497.4 million, as a result of fewer tons sold.

Patriot Coal has reasserted its full-year sales guidance and lifted its met-coal sales guidance amid vigorous met-coal markets fomented by growing global economies as well as a met coal shortage, especially in the Pacific Rim -- all of which is prompting global steel companies to increasingly come to the U.S. to fulfill their coal needs, the company noted.

"Overall, we are pleased with PCX's performance," UBS analyst Shneur Gershuni wrote in an investor note. "Despite the challenges at Federal and tepid sales volumes, PCX reported solid cost/ton metrics, an important foundation for cash flow growth." In referring to "Federal," Gershuni was referencing Patriot's Federal No. 2 mine near Fairview, West Virginia, whose operations were resumed in March 8, three days after being suspended when the company found an air quality measurement to be out of compliance with its ventilation plan.

As a result of Patriot Coal's enlarged met-coal business, strong booked business ($106 a ton vs. the UBS estimate of $90 a ton), and the opening of the Black Oak metallurgical mine this fall (which will impact 2011 and 2012), Gershuni holds a stronger outlook on the company's earnings per share.

-- Reported by Andrea Tse in New York

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