Coal Supplier Proves There's More Than One Kind Of Black Gold
Investor's Business Daily
Friday August 19, 7:00 pm ET
Alan R. Elliott
biz.yahoo.com
When two coal trains tumbled off the tracks just north of Bill, Wyo., in May, the price of Powder River Basin coal began rising.
Crews continued repairing the damaged tracks through July. Consumers cranked up air conditioners against the long, hot summer. Electric utilities throughout the West and Midwest felt the pinch, shoveling up their coal stockpiles to meet demand.
The combination throttled already tight coal markets across the U.S.
"Over the past three to four years, demand for coal has actually outstripped production," said James Roberts, chief executive of Foundation Coal Holdings (NYSE:FCL - News). "Utilities and other major coal consumers have been using everything that's been produced and also eating into their inventories."
For utilities, lower coal inventories mean less insurance against interrupted deliveries in the future.
For Foundation Coal, which went public in December, the rising prices and solid outlook were just plain dumb luck.
The company processes and sells coal from 13 mines spread from the Appalachian mountain range in the eastern U.S. to the Powder River Basin in the Rockies.
Foundation initially formed as a group of acquisitions under German conglomerate RAG Aktiengesellschaft in 1999. RAG boosted the subsidiary's output from 2 million to 60 million tons of coal a year, creating the fifth-largest U.S. coal producer.
Coal Soar
Roberts came aboard in 2000 to unite the disjointed operations. He grew the group's production and bottom line while scrambling to create accounting and production operations.
Then, out of the blue in 2004, RAG announced it would exit the coal mining business and sell off its global mining operations.
"The announcement that we were on the auction block again was a bit of a surprise to us," Roberts said.
As Roberts worked to cement the operations together between 1999 and 2003, U.S. coal markets peaked, then crashed, then rose again. In 2003, demand from China helped nudge coal prices into a more steady upward trend.
While production of the hard, hot-burning Appalachian coals has been on the decline since 1988, mines in Wyoming, Utah and New Mexico have helped fill in the gap. In some cases, prices for the softer Rocky Mountain coal began to rise last year.
Western coal is a lower octane fuel than coal in the East, so more of it is needed to create the same amount of heat. While more U.S. coal is being produced in terms of sheer tonnage, the total fuel value has been slipping.
"Under normal circumstances, when a commodity is this hot, supply generally responds," said analyst William Burns of Johnson Rice & Co. "That hasn't happened."
In the West, coal is typically quarried from surface pits. Supply tends to be restricted by the number of rail lines and coal cars available.
In the East, where most coal is mined underground, the highest hurdles involve labor shortages and environmental and land acquisition issues.
Foundation Coal operates in both regions. This year the company plans to spend about $43 million to boost efficiency and output, and open markets across its operations, Roberts says
One plan is to upgrade Foundation's Emerald Mine complex near Waynesburg, Pa. The improvements will let the facility guarantee the load weight of individual rail cars, opening new markets along the weight-restricted rail lines in the northeast U.S.
This year's spending program also will extend Foundation's Eastern "longwall" mine operations. Automated equipment in the high-output, longwall mines shaves coal veins lengthwise, efficiently whittling away tons of high quality coal.
IPO Fever
Foundation's initial public offering was backed by an investment group led by Blackstone Group LP and First Reserve Corp. It was one of three coal IPOs in the past three quarters.
At least two more coal companies, International Coal Group and Trout Coal -- both based in West Virginia -- have also said they are planning initial offerings.
The IPOs are part of a move to finance new equipment and mineral assets.
The Energy Information Administration reports the U.S. exports only 2% of its coal production and imports about half that amount.
New China Syndrome
Companies such as Foundation increasingly are formed and act according to market demand issuing from overseas. Most of the current demand comes from China.
China's influence on coal might be for the better, says Luke Popovich, spokesman for the National Mining Association.
In the past, coal demand and prices climbed quickly but fell back even faster when production at many independent mines overcompensated for demand.
The combination of high prices and broad consolidation might provide a more consistent industry approach.
"That may give us a little more rationality in terms of production and therefore a little more discipline," Popovich said. "Some of the mining companies believe that is why we may see a longer upcycle this time."
The current upcycle is borne out in Foundation's recent financial returns.
The company posted second-quarter revenue of $329.5 million, up 31% from the prior year. Earnings came in at 44 cents a share vs. a 5-cent loss a year earlier.
Analysts polled by First Call expect full-year earnings to reach $1.45 a share, then move up 47% to $2.13 in 2006. |
