Due to the rising commodity prices, difficulties in productivity & planned production slowdown, investors should expect a meaningful contraction in Massey Energy's (NYSE:MEE) margins in 2006. Central Appalachia coal mining continues to face significant cost pressure given unique labor, environmental and regulatory factors.
MEE has lowered its production guidance due to the aforementioned problems and the management at MEE exhibits lack of ability to execute. Even though the pricing environment is solid, particularly in metallurgical coal, S&P believes that future tonnage expansion will be more difficult, due to systemic geological and regulatory issues in the Appalachias.
At first glance the value of MEE's reserves may seem cheap but investors would rather be in Peabody Energy (NYSE:BTU) or the South African ADR Sasol (NYSE:SSL). Given recent operational difficulties and concentration in the high-cost Central Appalachia region, I believe MEE deserves to trade at a discount to its peers.
MEE, BTU, SSL 1-yr Performance