Simply stated, this is a bad year to be an Appalachian coal miner.
Understandably, the region's coal industry continues to adapt to a far more engaged and exacting regulatory regime following the tragic mine explosion at Massey Energy's (NYSE: MEE) Upper Big Branch mine in April.
For Massey investors, 2010 just keeps getting worse. The miner lost $88.7 million during the second quarter (compared to a prior-year gain of $20.2 million), despite a 16% increase in revenue to $810 million. Charges directly related to the explosion carved a $128.9 million hole in the result. Even without that charge, Massey indicates the quarter would still have produced a loss.
Analysts appear to have been watching some alternate-universe version of Massey. Their consensus expectation for earnings of $0.33 per share makes me question their understanding of these regulatory dynamics. As usual, retail investors were their unsuspecting victims, as shares tacked on a further 6% loss Tuesday to an already massive sell-off since the incident.
Massey doesn't think it's likely that the Upper Big Branch mine will resume operations during 2010, and the company revealed that its longwall mining machine suffered significant damage. These massive machines, manufactured by either Bucyrus (Nasdaq: BUCY) or Joy Global (NYSE: JOYG), can take some time to replace or repair.
Fellow Appalachian miner Patriot Coal (NYSE: PCX) is having a tough year as well. A roof collapse and subsequent closure of its Harris No.1 mine, two production-stopping longwall moves, and increased regulatory activity all combined to constrain the company's intended production growth. The result was a disappointing 200,000-ton reduction in second quarter production, and also higher operating costs that averaged $56.69 per ton. Patriot lost $13.6 million during the second quarter, but essentially broke even after backing out $14.8 million in restructuring charges.
Fortunately, Patriot Coal is able to point to multiple growth projects in the works, aimed at raising lucrative met coal production to 9 million tons within two years. With risks of a double-dip recession raising the specter of sustained weakness in domestic thermal coal markets, I believe that met coal production and the ability to export it will provide a key differentiator among U.S. coal miners. Among the Appalachian operators, I think CONSOL Energy (NYSE: CNX) and Patriot Coal are worth watching. CONSOL reports earnings Thursday, and I'll be interested to see how the recent integration of natural gas operations impacts the company's performance.
For greater near-term safety, however, it's hard to argue against a move westward. Teck Resources (NYSE: TCK) enjoys easy export access to the Pacific rim. Further west still, my top pick Peabody Energy's (NYSE: BTU) Australian operations present a generational opportunity for sustained profitability. I still consider slaughtered stocks like Patriot Coal a terrific long-term investment at these levels, but under the circumstances, I can certainly understand a more westward focus.
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