Analysts Come to Coal's Defense Following Yesterday's Sell-off

Several firms are out with defenses on Coal names following yesterday's sell-off:

- Citigroup notes coal has benefited from structural change, with historically isolated/fragmented regional markets linking up and "going global." Mine shortfalls, transport constraints, thin stockpiles and voracious BRIC-country demand suggest that this process has several years yet to run.

The firm sees the recent 10 - 18% correction in respective equities to be excessive, in response to a downtick in European spot from records. This seems like profit-taking amid a deteriorating economy, and the "End of the beginning, not the beginning of the end." Met and PRB names should be insulated.

PRB coal is among the last large pools of cheap energy worldwide. They see it as 50 - 60% undervalued relative to C/N.App, while lags are typically 9 - 12 months. Focus is on test burns, exports and CTL/IGCC tech.

Citi is hiking forecasts across major US basins to levels in-line with survey data, with Met benchmarked to seaborne. The PRB is the only area where forecasts are materially above-market. As a result, they are upgrading Peabody Energy (BTU) and Arch Coal (ACI) to Buy.

- Morgan Stanley says they remain constructive on US coal equities despite the extreme weakness yesterday. The firm believes the case for very strong 2009 domestic thermal coal contracts remains in place. There is potential for further coal price weakness in global and US coal markets following recent strong gains. They believe any further equity weakness in response to softer OTC prices presents an attractive opportunity to build positions, and in particular, favorite Overweight–rated names Alpha Natural Resources (ANR) and Peabody Energy (BTU).

US coal equities have declined sharply, likely in response to a sharp drop in European and US OTC thermal coal prices. Morgan believes the coal price correction represented some profit-taking following the sharp run-up, rather than a change in coal fundamentals. They do not believe the latest $25/ton run to approximately $150 in coal prices was fully priced into the stocks, nor do they think it should have been.

Yesterday's price action does not pose a risk to estimates.

Notablecalls: Coal stocks are ready for a bounce this morning, I suspect. Apart from the usual suspects ACI & BTU, my favorite of the bunch is Cleveland-Cliffs (CLF) due to its exposure to metals. CLF was among the hardest hit yesterday and I feel it will trade back over $100 swiftly.

Deutsche Bank was out with a call only 3 days ago on CLF raising their target to $150 from $115. I suspect it is only a matter of time before they come to defend their stance on the name.

Comments

[pachanguero]

time to buy

[phinsuntanning]

is the R word after the I word !!!

[Piggybank]

I don't think so. That coal would do well under rising energy prices was logical. That the coal price would jump up that much, up to 150$, was less logical.

At the current price coal it is actually getting that high that, should coal go even much higher, coal would loose a lot of it's appeal. if coal will go much higher in price then it will also get more expensive for electricity generation than for ex. uranium, natural gas and windmills, and later even solar. If coal rises even more demand should start to decrease. Thats just my oppinion though.

But i don't mind. I mainly invest in alternative energy, wich is not doing so well as coal atm, however alternative energy always had it's cost as disadvantage, it was further from grid parity than other resources, but if traditional energy resources rise a lot then rather than alternative energy moving to grid parity, grid parity will move towards alternative energy.

Either however coal production can be seriously ramped up, and then the price of coal could drop, or it can't. In either case well get a lot more pollution if more coal is going to be used, and that is a positive for clean alternative energy as well.

But anyway, coal probably can't keep going up like oil does, because coal is far easier to replace with something else for electricity generation. Coal always had it's main advantage of being cheap, with quite a few disadvantage's ofset by that cheap price.

The coal mining stocks do trade at hefty PE's. It's quite a thing to consider. I'm not going to speculate here where coal stocks will move in the short term, but i thought that the rise of coal prices was unsustainable above a certain level, and wanted to express that.
In any case, you sure would need balls of steel to step into this sector and these stocks at this moment. there is quite some space for these stocks to potentialy retrace.

[haydete]

and just what is the currently available alternative? Producers are going to be smart enough to charge as much as they can and remain the cheapest choice. That is more logical than thinking other forms of energy are coming down.

[JJTERRITO]

Piggy Banks' comments are well thought out.However;with all this rhetoric about alternative energy my question is"What is available today/".The problem in the U.S. is the knee jerk reaction and lack of a comprhensive energy policy.If ANWAR was opened up ten years ago we would be importing one million barrels less of oil.When opponents of drilling say new oil sources are ten years away witjout positive action it will always be ten years away.Personally we could reduce global warming it the politicos would do less talking and more action.