Peabody Energy and Arch Coal Upgraded by Citigroup

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Includes: ARCH, BTU
by: FP Trading Desk

Some of the biggest winners on global stock markets have been coal companies, which have benefited from a massive leap in contract prices. But they sold off sharply yesterday on news that European spot prices for thermal coal fell off their record highs.

Citigroup Global Markets analyst John Hill figures that the sell-off was overdone, and that coal is benefiting from "structural change" as fragmented regional markets are linking up and "going global."

In a note to clients he wrote:

This [sell-off] seems profit-taking amid a deteriorating economy, and the 'End of the beginning, not the beginning of the end.'

Mr. Hill believes that the bull market for coal has several years left to run because of mine shortfalls, transport constraints, thin stockpiles and massive demand from emerging markets like China and India.

While he expects metallurgical coal prices to increase through 2009, he thinks that a lot of the names in that space are fully valued. But he believes that the coal producers in the Powder River Basin in the United States are undervalued, and has upgraded Peabody Energy Corp. (NYSE:BTU) and Arch Coal Inc. (ACI) to "buy" from "hold."

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