Coal Stocks Update From Dahlman Rose & Co. Follow Our Main Theme And Buy The Weakness. Develop A Good Average Price.

[ 1 ] June 22, 2011 |

Coal Sector Update

We believe the recent sector pullback provides attractive entry points for our favorite names. Continued strong met markets, along with a robust thermal export story, reinforce our bullish stance. We reiterate our Buy ratings on ACI, ANR, BTU, CNX, and WLT.

We see the current pullback as an attractive entry point.
We see a compelling entry point for the US coal producer universe, as current prices represent a significant discount to historical trading ranges and numerous positive fundamental industry drivers remain intact. The group currently trades at 5.5x 2011E consensus EBITDA versus a range of 6.0-8.0x for most of 2010, with the nearly three-month long pullback in coal equities pushing equities down from a 2011 high of 6.7x in early April.

Positive fundamentals remain intact in both met and thermal markets.
Positive fundamentals in both metallurgical and thermal markets continue to support earnings estimates through 2012. On the met side, returning Australian supply following December-January flooding has failed to significantly pressure prices, with the most recent 3Q11 settlements getting done only $15 below the $330/metric ton peak this quarter. Our earnings estimates use a relatively conservative $260 and $250 met deck in 2011 and 2012, respectively. Additionally, the thermal coal export story from the US remains robust due to increased medium- and long-term demand from reduced nuclear capacity in both Japan and Germany, as well as increased buying by India and China.

Reiterating Buy ratings as coal continues to significantly underperform.
The US coal group has declined 23% since reaching a 2 1/2 year high April 1. Coal in particular has been leading the way down for the already underperforming energy and mining sectors. We view the current pullback as an attractive entry point and are reiterating our Buy ratings on Alpha Natural Resources, Arch Coal, CONSOL Energy, Peabody Energy and Walter Energy.

Stock/    Current/       Target /    June 21, 2011

ACI   26.02      38.00
ANR  42.82    68.00
BTU   56.96     84.00
CLD   19.66      HOLD
CNX   48.17     65.00
JRCC  19.28    HOLD
PCX    20.77     HOLD
WLT  109.95  148.00

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Category: Markets and Trading

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