CONSOL Guidance, A Canary In The Coal Sector (CNX, MEE, FCL, ACI, BTU, JRCC)

CONSOL Energy (NYSE:CNX) announced a dramatic change in its guidance for the third quarter. Production is expected reach just 15 million tons, well below even the low estimate of 16.4 million tons in previous guidance. Operating costs are also expected to rise 8%-10% from second quarter levels of $41.60/ton. Essentially, the company attributed lower production to poor execution and more frequent safety inspections. CONSOL did reaffirm production guidance for the fourth quarter of 17.8-19.8 million tons.

Just over a month ago, we noted the declines in coal stocks, and the situation has not improved. The biggest loser since then has been Massey (NYSE:MEE), down 40%, followed by Foundation Coal (NYSE:FCL), off 37%. Arch Coal (NYSE:ACI), Peabody (NYSE:BTU), James River (NASDAQ:JRCC), and CONSOL are down 22%-28%.

One could argue that coal stocks tracked crude oil prices up, and thendown. And again, like crude, coal stocks got a bailout bump early thisweek. But that didn’t last, and it’s not likely to come back.  Now, thehopes are for "value calls" from analysts and investors.

Coal prices have flattened. According the US Energy Information Agency,Central Appalachian coal has remained at $140/ton since August 29th.Illinois Basin coal has dropped from $93/ton to $84/ton, Powder RiverBasin and Uinta Basin coal are essentially flat at a current price of$11.25/ton and $61.00, respectively. Prices will probably move up aswinter approaches, but recessionary worries and a slowing economy won’thelp bolster prices. Finally, operating expenses for all thesecompanies are sure to increase unless the miners reduce production. Andif they reduce production, well, there go profits.

CONSOL’s news has caused the company’s stock to drop by more than$4/share (about 8%)  in early trading. All the other mining stocks arealso down, with James River down the most (about $3/share, or 9%) onits announcement of its intention to sell 1.5 million new shares ofstock. There’s no good news coming from the mines today.

Paul Ausick
September 24, 2008