International Energy Agency Executive Director Maria van der Hoeven said in Paris last week that as much as half a million tons of additional coal-producing capacity could come on to the market every day for the next six years. This includes both coking coal, used in steel-making, and thermal coal required for power generation.
Coking coal in global oversupply
According to analysts, strong coking coal demand has been swamped by oversupply, leading to lower prices. Many coal producers committed to nexpansions or new mines in earlier years when prices were much higher, such as a $3.74B Queensland-based JV between BHP Billiton Limited (ADR) (NYSE:BHP) and Mitsubishi Corp (TYO:8058), expected to commence production next year.
Additionally, many Australian miners are trapped in ‘take-or-pay’ contracts with rail or port companies that ensure reserved capacity at export terminals. If they cut back production, they would still have to pay access fees to the transporters.
The gloomy global scenario means coking coal prices could average only around $154 a ton in 2014 compared to $159 a ton expected for the current year, according to analysts at RBC Capital Markets.
Tough for US miners
Citi analyst Brian Yu draws attention to a Platt’s report that says Anglo American plc (ADR) (OTCMKTS:AAUKY) contracted low-vol hard coking coal prices with Asian steel producers at $143/tonne FOB Australia, $9/tonne (5.9%) below the 4Q13 settlement of $152/tonne.
“However, with spot pricing assessed much lower at $133/tonne and investor expectations in the $140-$145/tonne range, our take is that this news is neutral for met coal levered names since many are well off their November highs,” he says in his research note, titled “1Q14 Settlement: Tough for US Miners but Weaker AUD Lessens Impact on Australia Miners, Lowering Estimates.”
With bad news baked into prices, Yu warns that consensus estimates for US coal producers, however, are still higher than warranted. “We do not believe consensus estimates properly reflect the favorable impact of higher priced contracts with domestic steel producers as well as carry over business that boosted 2013 results, and will be a headwind in 2014,” he says.
EBITDA estimates cut
In the light of latest pricing trends, Citi has cut EBITDA estimates across covered companies by 3-40% for 1Q14 as shown below:
Citi’s new price targets
In the light of the new EBITDA estimates, Citi analysts have restructured their price targets on US coal producers as follows:
|
Rating |
Rating |
Target Price |
Target Price |
Current Year Earnings Estimates |
||
| Company/Ticker |
Old |
New |
Old |
New |
Old |
New |
| Arch Coal Inc(NYSE:ACI) |
2H |
2H |
US$4.30 |
US$4.80 |
US$-1.47 |
US$-1.47 |
| Alpha Natural Resources, Inc.(NYSE:ANR) |
3 |
3 |
US$5.10 |
US$5.20 |
US$-2.31 |
US$-2.31 |
| Peabody Energy Corporation(NYSE:BTU) |
1 |
1 |
US$23.00 |
US$23.00 |
US$0.25 |
US$0.14 |
| CONSOL Energy Inc.(NYSE:CNX |
2 |
2 |
US$39.00 |
US$39.00 |
US$-0.02 |
US$-0.02 |
| Teck |
2 |
2 |
C$29.00 |
C$29.00 |
C$1.81 |
C$1.81 |
| Walter Energy, Inc.(NYSE:WLT) |
2H |
2H |
US$19.00 |
US$17.50 |
US$-3.12 |
US$-3.12 |
