Coal Mining Companies Drop On Lower Price Outlook

The Associated Press

ST. LOUIS (AP) â¿¿ Average coal prices will fall this year as more customers switch to cheaper natural gas, an analyst predicted, weighing on coal mining stocks Tuesday.

Citi Investment Research analyst Brian Yu said he expects coal demand to be tepid in 2012, while coal production increases slightly. That will drag down coal prices and could hurt margins for big coal miners like Patriot Coal Corp. and Peabody Energy Corp., Yu said in a note to clients late Monday.

Coal is also sold to utility companies that use it to generate electricity, including about half of all power produced in the United States. But demand for coal in that market is being undermined by cheap natural gas, Yu said.

Natural gas prices are falling as more producers tap wells in U.S. gas fields like the Marcellus Shale. The rising supplies have causes prices to fall about 40 percent over the last year, from about $4.50 per 1,000 cubic feet in mid-January 2011 to about $2.70 per 1,000 cubic feet last week. That is prompting more utility companies to switch power plants to natural gas supplies instead of coal.

As a result of lower coal prices, Yu cut his target price for shares of several mining companies. He trimmed his target price for Arch Coal Inc. to $22 from $23, for Alpha Natural Resources Inc. to $24 from $28 per share and he dropped Consol Energy Inc. to $48 per share from $50 per share. He cut his price target on Peabody Energy to $55 from $60, though it remains his top pick in the industry based on management's steady execution, the company's growth and its low-cost mines.

Shares of several coal producers fell, while broader markets rose. The Dow was up more than 150 points earlier in the session before paring back some gains to close at 12,482.07. It was the Dow's highest close since July 26, before the European debt crisis set off months of volatility.

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