An Opportunity Too Coal to Pass Up

• Email
• Share
• Print

You may have noticed that The Motley Fool replaced that spooky Panic 2008 header with Opportunity 2008. Following an indiscriminate commodity sell-off of irrational proportions, and given the sharp reversal of the U.S. dollar in recent days, I believe that when it comes to select commodity sectors like coal, the headline could be amended to read: Opportunity of a Lifetime 2008.

Eastern U.S. coal miner Patriot Coal (NYSE: PCX) this week joined a growing chorus of companies touting the robust long-term fundamental outlook for coal -- regardless of any short-term reverberations from global financial challenges. Especially while Patriot shares remain 80% cheaper than they were just four months ago, the near-term impact to earnings from regionwide production challenges should be of little concern to the long-term investor. In fact, given the importance of Appalachia to world markets, these challenges should serve to support long-term prices.

Despite beating analyst estimates with $490 million in revenue and swinging to a $73 million net gain from a loss a year earlier, the result would have looked quite different without a one-time gain of $122 million. Without it, Patriot would have posted a loss for the quarter just as competitor Foundation Coal Holdings (NYSE: FCL) did last week -- and for virtually all the same reasons.

Both Foundation and Patriot report an identical set of challenges to Appalachian coal production; Fools can expect these to afflict every producer in the region until we learn otherwise. These include an acute labor shortage, increased labor costs, a stringent and uncertain regulatory environment for permitting, and increased mine safety site inspections.

Addressing these issues, Patriot is stepping up labor recruitment, miner training, and adding staff to accommodate site inspections. Still, these and other factors yielded a 1.4 million ton production shortfall from earlier projections, and the company expects similar challenges to remain a factor in the fourth quarter.

As the panic of 2008 abates, coal is definitely still a hot commodity. Whether we look to Peabody Energy's (NYSE: BTU) incredible earnings, benefits to rail companies like CSX (NYSE: CSX) and Burlington Northern Santa Fe (NYSE: BNI) from strong coal exports, or the crystal-clear assessments of bullish long-term fundamentals from leading miners like Arch Coal (NYSE: ACI) and CONSOL Energy (NYSE: CNX), I believe coal miners at these prices represent some of the very best means to transition out of panic mode and start seeking long-term opportunities.

Further Foolishness:

• Peabody's third quarter was truly epic.
• More on the uncertain regulatory environment.
• This correction in coal has been absolutely brutal.