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Business Booming for Coal Companies: ; Stock Prices Are Up, Demand is at Record Levels, and Companies Are Hiring

Posted on: Saturday, 6 August 2005, 00:00 CDT

Coal, a boom-and-bust business, is booming.

Coal company stock prices took off last year and today are at or near 52-week highs. The spot price of central Appalachian coal is more than $55 a ton. Companies are hiring. And corporate bottom lines have turned from red to green.

Peabody Energy is an example. Last month the world's largest private-sector coal company reported earning $95.3 million in the three months ended June 30, more than double its earnings in the same period a year ago.

"Coal markets are extremely strong, demand is running at record levels, customer inventories are at an all-time low, and our operations are in excellent position to meet growing customer demand," said Gregory Boyce, president and chief executive officer- elect of Peabody Energy.

"All of this translates into a very positive growth profile for Peabody's future earnings and cash flows."

David Khani, an energy analyst with the investment bank Friedman Billings Ramsey, said last year's promise of outstanding financial performance is now starting to materialize.

Coal companies are benefiting as long-term, low-priced coal supply contracts expire and new, higher-priced contracts are signed, he said.

Massey Energy's experience illustrates the point. The revenue Massey receives for the coal it produces has risen from $30.14 a ton in the second quarter of 2003 to $41.88 in the second quarter of 2005.

"It's not over yet - 2006 is going to be an even much bigger year" as more low-priced contracts expire and are replaced, Khani said.

High oil and natural gas prices are helping drive coal prices. Khani said other factors are at work, too.

"Rail shipment issues in the Powder River Basin are stifling some of the demand for coal out there, so replacement has to come from somewhere," he said. "Some is coming from the East, some from imports and some from utilities' burning stockpiles.

"This is a temporary shortfall but it outlines the fact that not only is the coal supply tight, infrastructure is very tight," he said.

Another factor: "We're having a hot summer, so the coal burn is up and you're starting to see some utilities go into the spot market."

In January, Khani forecast that eastern coal would trade at $54 a ton next year. That was before the western rail problems and the hot weather. Given those factors, "Clearly you could see the mid-60s" next year, he said.

Even though the outlook for coal is rosy, Khani believes central Appalachian coal production will probably decline over the next five years because remaining reserves are harder to bring to market, it is taking longer to receive mining permits and the industry has not built up an experienced workforce.

The demand for experienced miners is evident from the help wanted advertisements in the Charleston newspapers and the billboards posted along the West Virginia Turnpike.

Massey Energy's workforce has increased by 29 percent in the last two years, from 4,259 employees to 5,504. The company granted an across-the-board wage increase last October, in the hope of attracting and keeping dedicated workers.

Even so, "Our greatest impediment to growth and improved productivity continues to be the challenge of finding and retaining experienced labor, especially for our underground operations," Massey Chairman and Chief Executive Officer Don Blankenship told investors last week.

There seems to be a great deal of confidence surrounding the energy markets right now, particularly as it relates to coal, said Bill Raney, president of the West Virginia Coal Association.

"The time for investments to be made of course is right now, so we can ensure production of coal for the next decade," Raney said.

"Reserves are clearly getting more expensive and difficult to mine," Raney added. "That accentuates the need to invest in the infrastructure that is necessary to get to the reserves. That's where we as an industry and the state - everyone - needs to come together to make sure we're making those investments today, while the industry is strong and positive."

Raney said the West Virginia coal industry wants the state to enact tax incentives that encourage the construction of slopes, shafts, roads and preparation plants.

"We think any kind of incentive program would have a net positive benefit to tax collections in West Virginia because you're ensuring the longevity of mining of the coal if you can get the infrastructure in place," he said.

"When we send that mine manager from West Virginia to St. Louis or Pittsburgh or Chicago or Baltimore, he needs to have every possible tool so he can argue that his company should invest that $200 million in West Virginia, as opposed to Montana or Illinois or a foreign country."

Raney said an effort is under way to address the industry's shortage of experienced labor. The creation of the Mine Training and Energy Technologies Academy may be announced next week, he said.

The academy would provide training "so at the end of a four-week curriculum you have a more-than-knowledgeable employee who is ready to start in the mines," Raney said. The academy will be a partnership with Southern West Virginia Community and Technical College and the West Virginia University Mining Extension Service.

Raney said the industry is looking forward to the establishment of the academy because it will give some needed structure to the mining career path.

People who choose to become coal miners have an opportunity to earn about $52,000 a year with benefits, Raney said. "That's a real opportunity in the 26 coal-producing counties we have."

Contact writer George Hohmann at business@dailymail.com or 348- 4836.

Source: Charleston Daily Mail

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