James River Coal: Emerging Long-Term Optimism

Rising fuel costs have grabbed the headlines over the past few years, with consumers feeling the pinch at the gas pump and in heating their homes. Much of the attention has focused on crude oil and natural gas, keeping coal buried deep in the news coverage.

Yet coal prices are rising, too, mostly on increased demand from Europe and Asia, and production shortages overseas. That’s good news for U.S. coal producers of all sizes, including James River Coal Co. (Nasdaq:JRCC). The stock closed Monday at $26, then following a release Tuesday morning that showed a steeper-than-expected first-quarter loss, the stock actually gained 10.31%, closing up $2.68 at $28.68.

That’s not some sort of a weird reverse reaction. Most of those gains followed a midmorning conference call, on which James River Coal’s chairman and chief executive, Peter Socha, offered his take on rising prices, and how his company is likely to benefit.

Coal is hot, with the Dow Jones U.S. Coal Index up 75% in the past year. Ahead of its Q1 report, James River Coal on Monday hit an intraday 52-week high of $27.19 — roughly eight times the 52-week low of $3.56 hit Aug. 16.

Investors have to dig deep into James River Coal Co. for that diamond in the rough. Analysts following the Richmond, Va., mining company offer a favorable outlook, with three calling it a “buy” and two rating it “hold,” according to Thomson Financial.

Founded in 1988 through the combination of smaller operations, with others added over the years, James River Coal overextended itself and entered into bankruptcy protection in 2003. A new James River Coal emerged from the tangles of Chapter 11 the next year, but in the three years since the company has not reported a profit, with an annual loss of $54 million in 2007.

James River Coal mines, processes and markets bituminous, steam- and industrial-grade coal, with two utilities in Georgia and South Carolina accounting for 47% of its 2007 revenue. The company has six mining complexes, with five in the Central Appalachian [CAPP] region of eastern Kentucky, and one in southwestern Indiana. As of Dec. 31, James River Coal estimated that it controlled about 225.3 million tons of proven and probable coal reserves in Central Appalachia, and 42.6 million tons of reserves in Indiana.

From Tuesday’s first-quarter financials and conference call, despite the short-term cloudiness, some long-term optimism is emerging for James River Coal.

For the three months ended March 31, James River Coal reported a loss of $16.7 million, or $0.78 per share, compared with a loss of $7.3 million, or $0.46 a share, in the year-ago period. The consensus estimate at Thomson Financial had called for a loss of $0.50 per share.

James River also missed the Street’s revenue estimate of $140 million; the $138.2 million was an improvement from the $132.4 million reported in the 2007 quarter. The company blamed higher-than-expected costs, which were in part weather-related.

Coal shipments for the quarter of 2,197 tons from Appalachia and 725 tons from Indiana paralleled those of the year before. But the industry’s rising prices were visibly creeping in, with the average sales price per ton of CAPP coal rising to $52.56 from $47.56 the year before. Gross margins remained little changed.

“The first quarter of 2008 was quite a watershed period for the coal industry, one that we have monitored closely,” he said. Prices are climbing past $100 a ton for 2008, and in the $90s for 2009 and in the $80 to $90 range for 2010, he said.

What’s happening, Socha said on a conference call with analysts, is that the market is tightening — especially in the Mid-Atlantic and Southern regions where James River Coal has customers — and spot prices are rising. What James River Coal is looking to do is lock in these higher prices for long-term contracts.

With a growing international demand, “our view is that the domestic market right now is playing a larger role in meeting the world demand,” Socha said.

Plentiful supplies at the beginning of the year are dropping. “We could be in a very short situation by the end of the year,” along the East Coast, he said on the call.

James River Coal is looking to parlay its excess 2008 tonnage into long-term contracts, and by later this summer hopes to have deals for 4 million to 5 million tons for 2009 delivery and another 2 million to 3 million tons for 2010.

The company is also looking to rein in costs, pay down debt and be cash-flow positive in the coming years. James River Coal also is transitioning away from some of its costly deep underground mines to lower-cost surface-mining operations.

Ahead of the company’s report, UBS analyst Shneur Gershuni on April 30 upgraded James River Coal to a “buy” from “neutral.” After 2007 results came out, Raymond James analyst James Rollyson wrote to clients that the “earnings rocket is fueled and ready for takeoff.” He has an “outperform” rating on James River and expectations of earnings per share of $2.50 in 2009.

James River Coal has taken its lumps, but in the coming years it could help satisfy the voracious global energy needs.

Disclosure: none

Comments

[buyitcheap]

So they can't expand gross margins during a period of rising prices andthis is a reason for optimism? I'd suggest all that optimism got priced in during the week it took off 45%.

[False Profit]

The co. is generating losses and burning cash. By the time they get to profitability (if ever), they would have burned through a lot more cash, so the EV will be higher. Also, their costs are rising, and I don't think they will ever earn more than $1 per share. This stock should be at $12.

[dimensionalanalysisman]

fair value estimate is 11.00 max. the company has problems securing financing due to debt covenants from the 2003 bankruptcy and is mining in the most washed up region for coal in the US. this reminds me of the irrational exuberance in 1999 tech sector. this a balloon waiting to pop. this company is a money waster and the ceo is a bankruptcy rescuer not a coal guy. an absolute joke that the company loses more and more money with coal prices where they are.