S&P raises concerns about the future of Central Appalachian coal producers
Anticipating coal miner Massey Energy’s coal shipments to be weaker than previously forecast, Standard & Poor’s lowered Massey’s outlook from "stable" to "negative."In a research update published Thursday, S&P analysts Sherwin Bradford and Marie Shmaruk said their ‘BB-‘rating on Massey "reflects the company’s limited geographic diversity, difficult mining conditions in Central Appalachia, high cost position, and somewhat aggressive financial policy.""Still, the company is the largest producer of high-quality, low-sulfur coal in Central Appalachia, and possesses an extensive reserve base," they added.Nevertheless, S&P considers Massey’s business position is weak and its financial profile aggressive. Acknowledging the fact the company is the largest Central Appalachian coal producer and that Massey’s cash costs are very competitive with other Central Appalachian coal miners, the analysts suggested Massey’s operations "are exposed to substantial risks, including a concentration of reserves in a high cost difficult to mine coal basin and onerous safety and environmental costs."The company is also facing lower near-term output due to weak demand," according to S&P.Meanwhile, Standard & Poor’s "remains concerned that the Central Appalachian coal producers will continue to lose market share to the Illinois Basin, Powder River Basin, and Northern Appalachia coal-producing regions during the next several years." The analysts advised that power plants in these regions are installing new emission control equipment that will make it feasible to burn the high-sulfur coal of these regions, "removing the sulfur advantage that benefitted Central Appalachian coal."In the meantime, weaker coal demand is dropping coal prices, with coal demand expected to decline domestically this year.The analysts said Massey’s liquidity position is adequate for the rating at least through 2010, as the company temporarily cuts back capital spending to around $150 million to $200 million. "While we expect Massey to use a portion of its cash to make acquisitions, we do not expect a material decline in liquidity in the near term," they advised."The negative outlook reflects our expectation that coal demand and spot pricing during 2009 will be lower than we previously expected because of the economic downturn," the analysts said. "We could revise the outlook back to stable if the company’s operating results exceed our expectation over the next few quarters ..."