Brean Murray And Dahlman Rose- Update Coal Prices And Outlook. Bullish On Coal

[ 0 ] January 24, 2011 |

See below the chart today from Dahlman Rose on coal shares as well as the industry outlook from Brean Murray below. We remain bullish on coal and would use any weakness to continue accumulating shares. LFS and W&B.


Ticker Rating Price* Target

ACI Buy $31.61 $43.00
ANR Buy $55.22 $72.00
BTU Buy $58.17 $78.00
CLD Hold $21.17 –
CNX Buy $50.23 $59.00
ICO Buy $8.25 $12.00
JRCC Hold $21.50 –
MEE Buy $52.71 $66.00
PCX Hold $23.18 –
WLT Buy $119.99 $142.00

From Brean Murray’s Report This Morning.

Investment Summary

We wanted to give an update of our thoughts on the coal space, especially given that Peabody kicks off coal earnings season tomorrow. As a whole, we expect that the forward commentary (especially on the met side), will outweigh most of the negative issues (such as lower than expected output due to increased regulatory scrutiny and increased cost inflationary pressures). This is especially the case given that over half of the names have already preannounced some material aspect of their quarterly figures, so there shouldn’t be many negative surprises. With met coal spot prices approaching close to $400/ton in Australia, we would expect extremely bullish conference calls from met coal producers. We expect that some will follow in Alpha Natural Resources’ recent footsteps and raise their 2011 met coal expectations as a result. While thermal coal has been somewhat overlooked recently, we would also expect companies to speak optimistically about recent U.S. thermal coal settlements with European buyers. The bottom line (especially in light of the recent pullback), is that we expect forward met and thermal coal expectations to outweigh everything else.

Given our bullish expectations on the met coal side we definitely would prefer to see clients positioned net long going into earnings. We go through our detailed 4Q10 thoughts for each name in our universe in the following pages. In terms of companies that we like both in general and specifically into earnings, we are most bullish on International Coal Group and Patriot Coal.

International Coal: We believe there is a very good chance that International Coal exceeds Street expectations, as MSHA data looked very strong. Importantly, we believe International Coal is overlooked by many investors on the met coal side, and if it continues its strong recent run of outperforming its peers operationally, we expect more investors to start to take notice.

Patriot Coal: Patriot has a fair amount of crossover met coal, and given the current extreme global tightness, we believe Patriot has a reasonable change to raise 2011-2012 expectations. If we are wrong, we believe the downside is limited, given fairly muted expectations based on a couple recent disappointing quarters.

In terms of companies that we are concerned about specifically into earnings, we are most concerned about Cloud Peak Energy and James River Coal.

Cloud Peak: We are decreasing our 2011 EPS estimate to $1.77, versus consensus of $2.21. This is largely the result of a higher tax rate post-Rio Tinto selling its stake in Cloud Peak. With Street numbers likely having to come down significantly (and no positive met coal datapoints to offset this), we believe earnings will be a negative catalyst for the company.

James River: Eastern producers (including Central Appalachian giants Massey Energy and Alpha Natural Resources) have recently raised their cost expectations. Given this trend, we are concerned James River follows in their footsteps (relative to expectations), especially in light of MSHA data that came in lower than we had been modeling in.


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