Coal and the "Edward Scissorhands" Dilemma

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.

Further Foolishness:

The "Coal" tag within the Motley Fool CAPS community lists 21 coal companies. Find out what other investors are saying about the stocks you're watching, or share your Foolish thoughts with us. CAPS is free and fun!

Fool contributor Christopher Barker wishes he could squeeze mediocre coal miners into diamonds. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Arch Coal and Peabody Energy. The Motley Fool scrubs its disclosure policy before releasing it into the atmosphere.


Read/Post Comments (2) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 13, 2009, at 6:20 PM, Brettze wrote:

    True or False? Firewood is cleaner than coal... True o r False True or False,... True or False..... True or False....

  • Report this Comment On February 13, 2009, at 6:20 PM, Brettze wrote:

    False!!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 831976, ~/Articles/ArticleHandler.aspx, 11/25/2014 6:23:30 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement