In a recent report from Doyle Trading Consultants, "Coal Unit Retirement Analysis - From Mine to Grid," Senior Vice President Gordon Howald looked at a large portion, (243 GW) of coal-fired generating capacity in the U.S., representing about 735 million tons of coal deliveries in 2010. A key takeaway from this report is that Arch Coal, (ACI), Peabody Energy, (BTU) and Alpha Natural Resources (ANR) will be most negatively impacted in the years ahead.
While there's been plenty written about coal plant retirements and the possible impact on utilities, DTC's report is the only one I've seen that takes the next step in the analysis by identifying which coal companies, and in fact which coal mines, are most at risk. Of more than one hundred public and private coal producers that were analyzed, 40 were detailed in the report. This analysis is hugely important to the coal market in coming years. (Note: This report should be interesting to fixed income investors who are particularly sensitive to events that might shape a coal or utility company in the next 3-5 years, i.e. when a corporate bond might be maturing.)
In total, DTC believes about 50 million tons of PRB production are vulnerable to coal plant retirements. And again, the vast majority of tons lost could be from mines operated by Arch, Peabody, and to a lesser extent Alpha. Arch alone has 25 million at-risk tons. The implications are significant, (especially for Arch). On a mine by mine basis, one major mine from Arch and one from Peabody could be severely impacted by cuts. Material cuts at important mines could make those mines uneconomic, or at least much less profitable.
Coal plant retirements in the PRB will increase the stakes with regard to trying to get ports built for increased thermal coal exports to Asia. Already, ports in the Gulf are shipping a lot more coal and expansions are well under way. Arch is railing coal to ports in western Canada, but this hardly seems to be a long-term solution. The big picture contemplates new port throughput on the west coast. Without significantly more west coast port availability, the demand destruction outlined in DTC's report could cause serious problems for Arch and Peabody.
The big winner in all of this might be players that have meaningful exposure to the Illinois basin. Natural Resource Partners (NYSE:NRP) is well positioned in that regard. Since the Illinois basin is taking share from Appalachia, AND is a low cost and high heat, it will not be subject to coal production curtailments due to coal plant retirements. Please see my latest article on NRP here.
The above summary of DTC's report does not do it justice. I focused on a just a few key take always that are important to the type of articles that I've been writing on SeekingAlpha. I encourage investors who are focused on the coal and utility markets as investors or industry participants to request a free trial of DTC's research and market commentary. Click here to go to the DTC website.
Disclosure: I have not in the past, nor do I currently receive compensation, in any form, from recommending that readers request a free trial of DTC's research and market commentary.