Massey Shipments Down, Potential Deal on the Horizon
Massey Energy (NYSE:MEE) is the 4th largest coal company in the United States and the largest in Central Appalachia based on produced coal revenue. Massey has a total of around 2.3 billion tons of high quality coal reserves. The size and quality of its coal reserves enable it to provide top quality products to wide range of customers including thermal coal for power generating utilities, custom blend industrial coal for industrial customers, and high quality metallurgical coal for use in the production of steel. It competes with Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI) and CONSOL (NYSE:CNX) Energy.
The Produced Coal segment constitutes around 84% of the $46.98 Trefis price estimate for Massey Energy’s stock.
Shipments Fell Short in Q4
Q4 2010 produced coal shipments fell short of expectations by around 1.4 million tons. The produced tons sold for the quarter were 8.9 million tons and for the full year were just over 37 million tons. The company said that the shortfall was largely due to “lower productivity in deep mines, inconsistent rail service and delays of export shipments at ports”. [1].
The company which reported operating losses in the 2nd and 3rd quarters following the April mine disaster, is expected to report an operating loss for the 4th quarter as well, with the shortfall in shipments increasing the per ton cost of production. However, the company should rebound from the difficulties it faced during 2010 due to the April mine explosion and states that it is committed to improving its performance in 2011, in addition to boosting its safety standards in order to reduce regulatory violations.
The full year produced tons of coal sold of just over 37 million tons is roughly in line with our current estimates for total shipments, which is the sum of the shipments of utility coal, metallurgical coal and industrial coal. However, we feel that the shortfall is temporary and would not have an impact on our long term forecasts.
Utility coal produced is the largest segment by our estimates and accounts for around 45% of the stock value. You can see the impact on total coal sold in the chart below.
Potential Buyout in the Works
However, the company’s financial difficulties since the April mine explosion has caused the company to consider strategic alternatives. Management recently noted that it is still reviewing its options in this regard. Alpha Natural Resources, a rival coal miner operational in the northern and central Appalachian region, made an offer to buy Massey which is being reviewed by the board. [2] Arcelor Mittal has also expressed its interest in a deal, and we wrote recently about Massey exploring its options with International Coal. (See Massey Energy’s Interest in International Coal Highlights Synergies, Raises Questions on Management)
Alpha Natural Resources may be considering the acquisition because one of Massey’s main competitive advantages is that it is the largest coal producer in the Central Appalachia region, which is a source of low cost proven reserves. Massey controls around one-third of the reserves in that region. Hence, it is expected to have cost advantages over other producers in the log-run as other producers will have to move to higher cost reserves. If Alpha Natural Resources were to acquire Massey, this could lead to synergies making the combined entity more competitive going forward.
The produced coal EBITDA margin increased from around 13% in 2006 to 22% in 2008, with increasing global demand for coal resulting in higher profit margins for coal producers like Massey. However, with the global economic downturn leading to a fall in economic activity across the world, profit margins fell to around 16% in 2009. As the economy recovers, we expect profit margins to rise to around 18% by 2013 and stay about flat thereafter. A roughly 1 percentage point increase in the EBITDA martin to 19% by 2013 would translate to around 6% upside to our price estimate.
See our full estimates for Massey here.
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Notes:- Massey Energy Fourth Quarter Shipments Fall Short of Expectations [↩]
- Alpha Natural makes offer for Massey Energy, Reuters.com, Dec 21 2010 [↩]