Patriot's woes highlight coal industry struggles
Wed May 23, 2012 5:11pm EDT
* Patriot case seen as symptom of coal crisis
* Miners facing low prices, high costs, China slowdown
* Patriot stock rises 22 pct
By Steve James
NEW YORK, May 23 (Reuters) - Patriot Coal, which is trying to refinance its loans after warning that a customer might default on a contract, is a symbol of a growing crisis in the U.S. coal industry, analysts said on Wednesday.
A day after Patriot's stock plunged more than 50 percent on fears it was looking to restructure, Wall Street analysts said major companies in Central Appalachia like Alpha Natural Resources, Arch Coal and James River Coal Co are also struggling to cope with high costs and low prices that threaten some smaller operators.
"The thermal coal market is as bad as it's been in modern history and combined with mining costs in Central Appalachia, it is difficult to make any money," said analyst Mark Levin of BB&T Capital Markets.
Many producers, including Patriot, have been forced to idle production, while coal is piling up at U.S. power plants, as utilities have switched to low-cost natural gas to fire generators.
Export markets, which had been a bright spot for the industry, also have slowed. Asian traders say China is delaying or refusing shipments of both power-generating thermal coal and steelmaking metallurgical coal, in a sign its appetite for commodities is cooling.
According to the U.S. Energy Department, coal production in the first quarter was 8.1 percent lower than the 2011 period. Coal consumption fell 18 percent in the third quarter of 2011 to the lowest since 1995 and total coal carried by railroads fell to the lowest level in the first quarter since 1994.
Prices for thermal coal have dropped about 20 percent this year. Exacerbating the situation, a relative mild winter reduced demand for power, so utilities have been producing less electricity, while still taking deliveries of coal they were contracted to buy.
Utilities are looking for ways to lower stockpiles by pressuring coal companies to defer or delay deliveries, renegotiating contracts, or burning the coal in their plants even though it costs more than the gas.
Typically, thermal coals contracts are for periods of 1 year to 3 or 5 years. In contrast, metallurgical coal contracts are usually on a monthly basis and often signed weeks before delivery.
One company, GenOn Energy, a wholesale electricity producer with operations in 12 states, has even declared "force majeure" -- a legal term meaning it cannot be held to contractual obligations -- because it has too much coal and nowhere to store it.
Patriot said in a filing with the Securities and Exchange Commission that in the first quarter it received $7 million from cash settlements with customers who requested to cancel or delay shipments of coal this year.
SURPRISE ANNOUNCEMENT
On Tuesday, Patriot, which sold about 31 million tons of coal last year, said it was in talks for a new $625 million loan package and said it has engaged Blackstone Group as an adviser.
The company's stock fell more than 50 percent initially, but recovered somewhat to close at $2.18 -- still down 35 percent. On Wednesday it closed 22 percent higher at $2.66 on the New York Stock Exchange.
Analyst Michael Tian of Morningstar noted that Patriot, as a relatively low-quality Central Appalachia miner, had been under stress for some time. Its stock had declined from $25 a year ago before the announcement that an unnamed customer might default on a contract.
"This kind of surprise announcement freaks out a lot of people and it calls into question all their contracts," Tian said. They (lenders) may ask if that contract doesn't stand, who knows what else might not?"
Although Patriot was in a poor position financially, all mining companies in the Central Appalachian coalfields of Virginia, West Virginia and eastern Kentucky are affected by low prices, high costs and a slowing down in China, he said.
But he noted that Arch and Alpha and James River have more leverage and are acting to strengthen their finances. Arch last week closed on a new $1.4 billion term loan, Alpha cut its 2012 production target and James River managed to narrow a first-quarter loss though an aggressive cost-cutting campaign.
"They have a better liquidity profile and Patriot was the one with its back against the wall," said Tian.
BB&T's Levin noted about one-third of the coal from the region comes from private mining companies, who could be driven out of business by high costs and low sales prices.
"Central App is at the high end of the cost curve, it will be difficult for small companies to survive this stress," he said. "But I don't see any of that happening to Patriot in the near or immediate term."
Meanwhile, Patriot Chief Executive Officer Richard Whiting said in a letter to employees that the company was in discussions with the customer who might default, and other potential buyers, for the 1 million ton coal shipment. "We are confident it will ultimately be sold - although not at the original contract price, which was measurably higher than the current spot market."
He said the company was confident it could bolster its financial position. "We and other coal producers have encountered similar business situations in the past and we have successfully achieved satisfactory resolutions."
Analyst Lucas Pipes, of Brean Murray Carret & Co said despite Patriot's efforts to get improved loan deals "without a significant change to thermal coal demand prospects or a tightening met coal pricing spread, we believe there is currently only limited upside to the stock."
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