In an industrial-strength version of Bowie's Space Oddity, the coal sector appears to be floating in a most peculiar way. Back here at ground control, this Fool thinks there might be something wrong. Can you hear me, Major Coal?
Coal mining stocks have been on an absolute tear in recent days, bolstered by dramatic reversals of analysts' sentiments and morsels of positive news from miners like Patriot Coal
Don't get me wrong ... I'm not complaining. I'm long some coal stocks myself (see disclaimer below), and I've been consistently bullish on coal's long-term outlook from the beginning of the sector's sub-orbital descent. Given the range of contrary near-term indicators that I've been documenting lately, however, the sudden exuberance of this coal rally feels a bit like a space oddity.
For insight, let's peek at last week's earnings from Patriot Coal, which was spun off from Peabody Energy
Looking forward, Patriot issued guidance that implies flat gross margins for the rest of 2009. Contracted prices for Appalachian coal average $58 per ton, compared to expected costs of $56 to $59 per ton. For the Illinois Basin, prices of $38 per ton will be offset by costs of $35 to $38 per ton. As a final note of caution, Patriot also echoed competitors by noting that clients are requesting deferrals of contracted volumes of both thermal and metallurgical coal.
I remain decidedly bullish on the long-term outlook for coal, but the degree of divergence between undeniable near-term challenges and the enthusiasm of this rally led this Fool to end his CAPS pick for Patriot Coal until Major Coal returns to Earth.