Surprisingly upbeat outlook from Peabody ignites US coal stocks

Peabody Energy, the largest coal miner in the US, announced on Tuesday it will again slash its capital expenditure program for 2012 as thermal coal prices hover near two-year lows.

The NYSE-listed company will now spend $1 billion – down  $200 million – this year , mainly in Australia. The company is on target with expanding its Millennium and Burton mine, but  development of earlier stage projects such as Wambo and Codrilla is being put on the back burner.

A steep drop-off in demand from Asia exacerbated by high inventories thanks to a mild northern hemisphere winter and a surge in US exports have led to the collapse in thermal coal prices, which have long been under pressure as US utilities switch to natural gas for power generation.

But Peabody points to some positive developments:

"There are bright spots amid recent market headwinds, including the recent increase in quarterly seaborne metallurgical coal prices, accelerating China coal imports and signs of stabilizing US coal supply-demand fundamentals. Longer term, rising electricity generation and steel production required to fuel growing economies of the Asia-Pacific region will continue to drive sustained increases in global coal demand," CEO Gregory Boyce in as statement.

While Peabody sees demand decline by 100 million to 120 million tonnes in the US, it forecasts a return to strong demand in the key Chinese market:

"China's coal imports are accelerating in recent months, and we project they will reach a record 285 million tonnes in 2012 as the country increasingly looks to the seaborne coal markets," said Boyce. "We expect global metallurgical coal use to increase 25 percent by 2016, translating to an additional 250 million tonnes of demand growth, with the bulk of increases led by China and India."

Coal for power generation at the port of Newcastle in Australia, the benchmark for Asia, crept back above $88 a tonne on Wednesday after hitting its lowest level since June 2010 last week. The thermal coal price is down more than a fifth since the start of the year. The post-financial crisis low for thermal was March 2009 – during that month coal averaged $65.36.

In contrast to the sharp declines in coal for electricity generation metallurgical coal has managed to stay in the $200–$235  a tonne range this year. Heavy rains in Australia at the start of last year drove the price briefly to $300 a tonne, but historically $200 and above translates to robust reward for coking coal miners.

Weak thermal coal prices have seen the shares of US producers – which have been switching to exports as domestic demand declined – plummet this year and Wednesday was a rare up day for stocks in the sector.

By midday Peabody was trading  over 4% higher at $21.98  affording the company a market worth of just under $6 billion. Year to date losses remain at more than 33% and this time last year the company was worth 61% more.

Peabody's more than 60% slump over the past year actually compares well to its peers which have seen their market valuations drop more than 80%.

These severely punished stocks enjoyed even better fortunes on Wednesday with Alpha Natural Resources and Arch Coal trading up 5% and 8% respectively. Walter Energy gained 2.5% while smaller counters like Patriot Coal shot up more than 13%.  Consol Energy which is also a natural gas and oil player added 3.9%

The Financial Times reports resource stock trading executives "are keeping tabs" on the falling valuations in the coal sector and that they are "close to the level at which [they] can see some companies attempting takeovers”:

But as any shopper well knows, buying cheap has its risks and other executives say they are not considering any approaches. Even at lower valuations, the takeover premiums are high enough to deter them from a bid. “Nobody wants to try catching a falling knife,” says one leading investor in the mining equity sector.

Image from the US National Archives shows a miner waiting to go into the elevator shaft at the Virginia-Pocahontas Coal Company mine near Richlands in April 1974.