Market Spotlight: Coal producers

Market Spotlight: Coal producers

	Published : Sun, 14 Oct 2007 21:03 By : Agencies Print this Story

NEW YORK (AP) - Production issues, higher diesel prices and environmental concerns plagued coal producers in the third quarter, but analysts suggest companies will be able to take advantage of a booming global economy and a ramp-up in U.S. power generating capacity in the longer term.

Increased safety inspections after recent cave-ins at underground mines are stalling production for some companies, said Friedman, Billings, Ramsey & Co. analyst David M. Khani, although the exact effect of these slowdowns is not yet known.

Production is also being stalled by geological concerns, Khani said, including those seen most recently last week by Foundation Coal Holdings Inc. and Consol Energy Inc.

Foundation Coal Holdings said coal production at one of its mines in Northern Appalachia slowed in the last few months because of sedimentary rock formations blocking some areas.

Consol Energy Inc. reported third-quarter production fell more than 1 million tons short of the bottom end of its forecast because of unspecified 'adverse geological conditions' at two mines and a roof cave-in at another.

The analyst suggests investors weigh their options carefully in the sector, and selectively buy companies with a focus on the Northern Appalachian region, metallurgical coal and international steam coal.

Metallurgical, or so-called 'met coal,' is used in steel production, while steam coal is used in boilers to produce electricity. Both are in strong demand from the global industrial boom, concentrated in China and India.

Khani favors Alpha Natural Resources, Consol Energy and Peabody Energy for their met coal resources and the most potential to take advantage of expected booming prices in that segment.

Bank of America analyst Daniel W. Scott said he remains 'bullish' on the sector, and favors companies that have investments in the Powder River Basin because of its rich and plentiful reserves and relatively cheap production costs.

The Powder River Basin extends through parts of Montana and Wyoming and is the single largest coal source in the United States, accounting for about 40 percent of the nation's annual coal production.

Stifel Nicolaus analyst Barry B. Bannister said some producers should also reap benefits from the expected boom in U.S. retail electricity prices.

As domestic electricity prices soar on rising fuel prices, capacity will need to increase significantly to meet demand, the analyst said.

Bannister predicts the need for capacity to increase by 201,100 megawatts by 2020 -- a 22.8 percent increase from 2006 numbers, with coal accounting for about half of the capacity additions.