In a bizarre move, perrenial coal worst of breed Patriot Coal (PCX) cut coal production for Q3 and all coal stocks dropped while the market was up. Now to be fair, most material stocks dropped Friday, but wasn't the production cut actually bullish for the other coal producers?
In a industry plaqued by soaring global demand, especially in China and India, and issues constraining supply, why would stocks drop when a competitor cuts production? PCX just proved that production is worth all that much more.
This news doesn't highlight more regulatory issues. It doesn't signal slowing demand. Doesn't it point out the difficulties of pulling coal from the ground?
PCX disclosed that the earthquake in Virginia likely caused a roof collapse that led to the closing of a mine in the Big Mountain complex. Also, two previously announced longwall moves a the Federal and Panthar mines took longer than expected. On top of that, the Panthar mine is now facing geology issues.
These issues just highlight how best of breed coal companies should be more valuable. Sure PCX deserved a 9% loss, but why didn't competitors rally? Demand isn't slowing or at the least isn't slowing from this announcement. On the contrary, demand is constant but supply just dropped 450,000 tons.
Peabody Energy (BTU) remains the best of breed in the sector while Alpha Natural Resources (ANR) remains very attractive after a massive drop this year even though it now owns the third largest met coal reserves in the world. Walter Energy (NYSE:WLT) is another interesting pick considering its pure play on met coal. WLT had a weak Q2 report leaving investors pondering the future and making it more attractive to snap up. WLT might be this year's Massey Energy (NYSE:MEE).
Friday's moves continue to prove that the market is never logical. Increased supply or lower demand should equal a selloff. Lower supply, however, should have ushered in a rally.
Details from PCX press release (see here):
Due primarily to geological issues impacting the Company's two longwall mines, as well as the early closure of a thermal mine, production in the third quarter is expected to be down approximately 450,000 tons.
Production at the Federal longwall was down over six weeks during the quarter as a result of geologic challenges that delayed the start of the move, as well as equipment issues impacting the restart process.
At Panther, difficult geology is expected to result in lower volumes in the third quarter, in addition to the scheduled longwall move.
The Company closed a contractor-operated mine in the Big Mountain complex during the quarter. The thermal coal mine experienced a significant roof fall in August, believed to be a result of the earthquake centered near Washington, D.C.
Disclosure: I am long ANR.