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'Mad Money' Spotlight: Cramer's Coal Picks

Cramer likes Peabody Energy, but thinks a caller should take a flyer on Patriot Coal.

Jim Cramer told a caller that if you want to play coal right, make room for

Peabody Energy

(BTU) - Get Peabody Energy Corporation Report

and take a pass on

Patriot Coal



Peabody Energy and Patriot Coal were down 7.1% and 8.3%, as many of the major coal stocks were beaten up in early morning trading.

So why is Cramer not feeling love for Patriot Coal? It could have something to do with recent news. At the end of April, Patriot Coal reduced its 2009 production outlook to between 34 million to 36 million tons. That's down from the 36 million to 38 million tons announced previously. Today, the company cut back its production outlook by another sliver to between 33.5 million and 35 million tons.

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In May, Dahlman Rose analyst Daniel Scott downgraded Patriot Coal from hold to sell, citing an expected pullback in coal stocks.

And this morning, Patriot Coal said it restructured a deal with a metallurgical coal customer. The customer had previously requested shipment deferrals for a portion of the original contract. The customer wasn't identified in the release, but did recommit to buying the remainder of second half 2009 volumes from the original contract, while offering a cash payment to cover 2009 shortfalls in the first half. Payments will be recognized as second-quarter revenue.

But Patriot Coal also said it was entering into arbitration against another customer.

"Coal producers continue to deal with customer requests to defer shipments, especially customers in the steel industry," CEO Richard Whiting said in a release. "As changing circumstances warrant, we will continue to work toward mutually beneficial arrangements with our customers that maintain the full value of our contracts."

Peabody Energy's recent luck was a little better by comparison. On Friday, Peabody Energy received a boost from the U.S. Energy Department. Energy Secretary Steven Chu announced a first-step agreement with the FutureGen Alliance on its long-running FutureGen project, representing a new life after the project was dropped by the former Bush Administration.

As conceived, when completed the project will create a coal power plant in Illinois that produces near-zero emissions. Peabody Energy is one of 11 companies in the FutureGen Alliance.

"The FutureGen project holds great promise as a flagship facility to demonstrate carbon capture-and-storage at commercial scale," Chu said. "Developing this technology is critically important for reducing greenhouse gas emissions in the US, and around the world."

Friday's announcement jump-starts plans for preliminary designs and cost analyses. The total price tag for the public-private project will likely come to more than $2 billion, with the Energy Department agreeing to put down more than $1 billion.

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