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The aptly named protagonist in director Tim Burton's Edward Scissorhands could trim a hedge like nobody's business. Given the incredible volatility the commodities sector witnessed in 2008, the trillion-dollar question for 2009 could be whether companies should be trimming hedges, or keeping Edward Scissorhands at bay.
Conveniently, two coal-mining companies with operations in Appalachia delivered earnings this week that open a window onto this important consideration.
Foundation Coal Holdings (NYSE: FCL ) recorded a 425% increase in net income year over year, earning $42.1 million. Revenue rose 27% to $454 million, and although overall production fell marginally to 17.8 million tons, the company highlighted a 28% increase and record production at its Northern Appalachian mines. Under the circumstances, the quarter was a resounding success.
International Coal Group (NYSE: ICO ) , meanwhile, revealed a loss of $37 million, despite its own 26% increase in fourth-quarter revenue. Even after adjusting for goodwill impairment charges and mine closure costs, International Coal Group would have lost $13.1 million.
Quite unlike Peabody Energy (NYSE: BTU ) spinoff Patriot Coal (NYSE: PCX ) , which indicated this week that it seeks to renegotiate underpriced coal contracts relating to the company's purchase of Magnum Coal last year, Foundation Coal Holdings CEO James Roberts boasted that his company is heavily hedged at favorable coal prices. A full 97% of 2009 production has already been priced, with most contracts inked before the severe coal price declines during the last three months of 2008.
International Coal Group, on the other hand, faces slightly more spot market risk, with 92% of planned shipments priced at an average of $61 per ton. Similarly, CONSOL Energy (NYSE: CNX ) has committed to sell 95% of planned 2009 production at $61.56 per ton. Each of these miners has achieved price protection to a similar degree, in stark contrast to a miner like Arch Coal (NYSE: ACI ) . Arch has the most unpriced tonnage in the industry, at 14 million to 18 million tons, or about 11%-14% of its estimated production for 2009.
Given dire economic projections for 2009, the miners with less spot market risk might indeed celebrate these forward contracts over the coming quarters. If, however, the combined impact of rapidly contracting industrial production and global stimulus efforts produce a resumption of coal demand that's more swift than many expect, then a lightly hedged miner like Arch Coal could in fact have the last laugh. Despite this possibility, both Foundation Coal Holdings and International Coal Group offer a safer road forward.