IB Net Payout Yields Model

Massey Energy Slammed By Q3 Operating Loss Forecast

That's the bad news. The good news is that 2011 targets remain intact and the all important met coal market remains strong.

After the close last night, Massey Energy (MEE) reported that Q3 production was lower then expected and operating costs were higher then expected. Not exactly an investor friendly combination. Of course that has always been the risk of investing in MEE after the Upper Big Branch explosion in early April as Stone Fox highlighted in July [Buy the Other Disaster Stock]. Management focused on the UBB investigation combined with regulators being extra cautious is never a good combination. Hopefully that will change as the year ends and 2011 starts.

Higher regulation has been a big issue in the US coal sector since the explosion. Short term that regulation just leads to higher costs and lower production impacting just about every company in the Appalachia region. See the Patriot Coal (PCX) news. Long term though it leads to higher prices because supplies will be reduced. Other then natural gas, just about all other commodities continue to face greater challenges in getting them out of the ground.

If you believe MEE management, and naturally most investors don't these days, most of the operational issues including restarting the Revolution longwall mine, restarting the Sprouse Creek processing plant, bringing the new state-of-the-art Zigmond processing plant on line and starting production at its Laurel Creek property will be resolved shortly.

MEE remains a favorite investment of our Opportunistic, Growth, and Hedged Portfolios especially since the stock tanked 7% today. Sure MEE is having operational issues, but mining companies should be valued based on assets and long term prospects of their commodities such as met coal. The story hasn't changed due to Q3 issues. Stock should be bought on this weakness. 

Snippets from the PR:
  • "Our operations have continued to struggle since April," said Don Blankenship, Massey's Chairman and CEO. "As we have noted earlier, increasingly stringent enforcement actions by MSHA across our operations and throughout the Central Appalachian region have resulted in lost shifts and loss of productivity. In addition, our Revolution longwall mine was idled in June for a planned longwall move but has remained down pending approval of its ventilation plan. As a result of these and other factors, we now expect our third quarter shipments to approximate 10 million tons and we expect to report an operating loss for the quarter."
  • "We remain confident that we will achieve operational improvements going forward," Blankenship stated. "As the Upper Big Branch investigation winds down, we have refocused management time and attention on our ongoing operations and we are initiating actions to improve productivity and re-establish operating consistency in all our mines. In addition, our early negotiations with metallurgical coal customers give us reason to expect pricing in 2011 will be favorable to what we have realized in 2010. Our guidance for 2011 remains unchanged."
Guidance Summary

(In millions except per ton amounts)

Shipped Tons
39.0 to 40.5
45.0 to 51.0

Average Price/Ton
$71.00 to $73.00
$82.00 to $86.00

Cash Cost/Ton (1)
$56.00 to $60.00
$57.00 to $61.00


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