Wednesday, July 14, 2010

Buy the Other Disaster Stock

With all the focus on BP, everybody has forgotten the damage done to the stock of Massey Energy (MEE) after the explosion at the Upper Big Branch Mine (UBB) in early April. MEE might be thankful for the attention focused on BP, but the stock price hasn't come close to recovering. All mining stocks are down over the last couple months so its not as though MEE has been harshly punished just for the explosion but it is down significantly more then industry leader Peabody Energy (BTU). The difference between MEE and BP and what interests us in the stock is that they've made several brilliant moves even in the face of the tragedy. MEE is working to enhance shareholder value while BP hopes to keep shareholder value from completely collapsing.

While the CEO of BP can't seem to catch a break, the CEO of MEE has made numerous moves that benefit his company. The damage to MEE seems to be in the past and recently they've done a decent job showing that the government is possibly responsible for the mine explosion that ironically killed many more people then BPs (29 to 11). Not that a tragedy should be completely defined by the lose of life, but that's usually a top focus of the public. The news releases are too numerous and detailed to outline, but I'd recommend any potential investor read through the May and June ones for more info.

I'd guess that a general survey of the public would result in very few people remembering the mine operator of the coal explosion. Not exactly the same case with BP. Of course it doesn't help that BP can't contain the spill and MEE has no ongoing damage. The explosion killed 29 people end of story. The key is that while BP immediately accepts all responsibility and rightfully so considering the ongoing leaks, MEE has continuously shown documentation to the contrary. In fact they've left reasonable doubt to the cause of the accident. Plenty of documents seem to exist suggesting that the MSHS is responsible for recommending a faulty method for releasing the methane gas. They may just be blowing smoke up this naive investors apron, but the differences in the 2 situations are night and day.

The curious part is that the stocks have taken similar paths. BP falling only 40% now and MEE down 47% since the tragedies. Interesting that they both now trade in the same range with every CNBC report debating on whether to buy BP or wait. What about MEE? Nobody mentions risk of MEE going BK like every other expert on BP. To us, MEE faces a lot less risk of extinction yet its faced a greater downward pressure. Doesn't that sound like a good recipe for a stock purchase?

In fact, MEE has done an excellent job of buying up the all important met coal assets that China will need (maybe even more so with the news on the yuan appreciation). They've also restarted several small mines to help cover the missed output from the UBB. Most importantly though they completed the purchase of Cumberland Resources that provides access to potentially 5M/mt of met coal per year. Naturally the market has completely missed the positives even if the media isn't as obsessed on the damage any more. Competitor BTU is only down some 15% from the April highs. Admittedly Alpha Natural Resources (ANR) is down 35% so some of the price action is related to the sector and fears of a China slowdown as a whole.


MEE also re-implemented the stock buyback plan of over $400M or over 10% of the market cap. Why would an investor interested in a oversold disaster play buy anything other then MEE? Why would you even discuss BP compared to the opportunity in MEE. The company is hopefully buying back 10M+ shares while BP will possibly issue more shares, borrow money at junk bond rates, and sell assets at distressed levels. MEE is extremely cheap selling at only 6x 2011 estimates. MEE is BP with much less political and damage expense. The investment decision seems obvious at this point though the debate focuses on BP.

Highlights of the bullish moves since explosion on April 5th:

4/19 - Completion of Cumberland Resources merger providing access to 216M tons of met coal and 416M tons in total. The deal also provides the opportunity to increase met coals by up to 5M tons of met coal per year without expanding capital expenditures.

5/6 - Reactivated service mines providing over 4M tons of steam coal over the next couple of years

5/7 - Expanded operations to provide over 750K tons of met coal over the next 1.5 years.

5/11 - Bought bankrupt met coal reserves in Pennslyvanica totalling over 8M tons.

5/11 - Re-initiated stock buyback with $420M available for purchasing over 10% of the outstanding shares.

6/15 - Issued a statement bringing the governments role in the explosion front an center. MEE points out that the explosion occurred shortly after changes were made to the venting of methane gas in the mine according to MSHA requirements.

7/8 - Purchases strategic River Terminal in West Virginia proviving cheaper access to exporting met coal

1 comment:

Anonymous said...

this report is absolutely brilliant.
Not only is the stock's value aspect interesting, but the company efforts to better position themselves for robust world coal markets in the longer term also seems to have merit. Met coal fetches more then double thermal coal. Massey may develope into quite the coal powerhouse this decade.