Patriot's Positive Turn Stuns

Feb. 2.11 | About: Patriot Coal (PCXCQ)

Coal producer Patriot Coal Corporation’s (PCX) fourth quarter earnings came in at 8 cents per share, overcoming the pessimistic Zacks Consensus Estimate of a loss of 35 cents. The company’s quarterly earnings was, however, shy of the year-ago quarter earnings of 12 cents.

For full-year 2010, Patriot posted a loss of 53 cents, faring better than the Zacks Consensus Estimate of a loss of $2.02. However, the company lagged the year-ago earnings of $1.49 per share.

Top-Line Scenario

Revenue in the quarter rose nearly 5% compared to last year, to $528.2 million, due to higher average selling prices offset by lower sales volume. However, net revenue lagged the Zacks Consensus Estimate of $551 million. Revenue for 2010 of $2.0 billion was marginally lower than 2009 levels and also the Zacks Consensus Estimate of $2.09 billion.

In the fourth quarter, around $452.2 million came from the Appalachia Mining Operations, $71.0 million from the Illinois Basin Mining Operations and $5.0 million from Other Appalachia Operations. In 2010, Appalachia and Illinois Basin Mining Operations contributed $1.7 billion and $276.0 million, respectively, to revenue, while the remaining $17.6 million came from Other Appalachia Operations.

Operating Highlights

Volumes sold in the reported quarter totaled 7.7 million tons (down 6.7% year over year), including 6.0 million tons of thermal and 1.7 million tons of metallurgical coal. Depressed production levels in the quarter resulted from the continued impact of higher regulatory blockades in 2010 as well as transport constraints late in the quarter. Appalachia Mining Operations’ share was 6.0 million tons while Illinois Basin Mining Operations contributed 1.7 million tons.

Full-year 2010 sales volume was 30.9 million tons, down 5.8% from the 2009 level, with about 24.3 million tons from Appalachia Mining Operations and 6.6 million tons from Illinois Basin Mining Operations.

In the quarter, revenue per ton rose $8.00 to $67.77 from the year-ago quarter, with Appalachia and Illinois revenues increasing 15% and 9.7% to $75.23 and $41.54 per ton, respectively. Overall, revenue per ton for 2010 showed an improvement of 7.6% to $65.37, with 7.4% growth in Appalachia revenue and 8.8% growth in Illinois revenue.

Operating cost per ton totaled $55.70 in the reported quarter, compared with $50.86 in the year-ago quarter. Operating cost per ton rose mainly due to lower production resulting in part from increased regulatory control. Despite the stringent regulatory scenario, various operational challenges and higher met coal volume in 2010, the company’s operating cost per ton for the year increased only 5% year over year to $55.49.

Financial Performance

Patriot Coal’s liquidity position at year-end 2010 was sound with cash and cash equivalents of roughly $193.1 million, and no borrowings on its revolving credit facility or its receivables securitization program. Available liquidity summed to about $400 million as of December 31, 2010.

Patriot’s capital expenditure totaled $28.4 million for the fourth quarter and $123.0 million for the full year 2010.


Patriot enjoys a strong metallurgical coal reserve base that can be developed with both incremental and large-scale projects to serve growing customer needs. Going forward, the company expects the coal markets to remain strong throughout 2011, given continued growth in economies around the world.

For 2011, Patriot projects sales volume in the range of 30-32 million tons, including 8.0-8.4 million tons of metallurgical coal sales. The met coal guidance for 2011 represents a meaningful increase over 6.9 million tons sold in 2010.

Based on this volume growth, cost per ton at Patriot is expected to be in the $63-67 range for the Appalachia segment, reflecting higher met production and transition to several new mines. Cost per ton for the Illinois Basin segment is expected to be in the $40-43 range.

For 2011, Patriot expects capital expenditures to be in the range of $150-175 million as it continues to expand its metallurgical coal output. Patriot has been focused on its metallurgical coal expansion and remains on track to produce more than 11 million tons of metallurgical coal by 2013.

Our View

Patriot’s fourth quarter results point to a significant improvement in the company’s sentiment. Despite recovering from the market pessimism in the last three quarters, this is the first positive earnings recorded by the company in 2010.

Given Patriot’s increased re-engineering initiatives along with improving global economies and markets, we expect the company to continue to post positive earnings going forward.

Based in St. Louis, Missouri, Patriot Coal is a leading coal producer in the eastern United States, having 14 mining complexes in Appalachia and the Illinois Basin. The company primarily competes with International Coal Group Inc. (NYSE:ICO) and James River Coal Co. (JRCC).