Coal: Producer Discipline needed For Return To Normalized Prices

CoalPhoto by Pavlofox (Pixabay)

Sterne Agee analysts Michael S. Dudas and Satyadeep Jain provide an outlook on gold and coal in regards to the global macro environment.

Broadly, metals and mining shares down 3%-4% while met focused names pressured 7-9%. While this morning’s release of the February employment report has generated possible marginal confidence in a more hawkish Fed, and a dollar bounce, recent Chinese credit market concerns caused industrial commodity spot prices in copper, met coal and iron ore to retreat around 5%. We continue to recommend select metals (Agnico Eagle Mines Ltd (NYSE:AEM), Coeur Mining Inc (NYSE:CDE), Gold Resource Corporation (NYSEMKT:GORO), Newmont Mining Corp (NYSE:NEM)) and coal names (Arch Coal Inc (NYSE:ACI), Alpha Natural Resources, Inc. (NYSE:ANR), Peabody Energy Corporation (NYSE:BTU), CONSOL Energy Inc. (NYSE:CNX)) and would add to positions on this pullback.

Sell off a buying opportunity

We continue to believe gold prices will trend higher as overall global monetary policy will lean towards accommodation, economic data flow will be mixed, physical demand will remain strong as flows move Eastward and technical support remains at or near moving averages. Mining shares should also benefit from cost, capital and operational discipline indicated by executive during the past several months. We rate Agnico Eagle Mines Ltd (NYSE:AEM), Coeur Mining Inc (NYSE:CDE), Gold Resource Corporation (NYSEMKT:GORO), Newmont Mining Corp (NYSE:NEM) as Buys and Barrick Gold Corporation (NYSE:ABX), Hecla Mining Company (NYSE:HL), Pan American Silver Corp. (NASDAQ:PAAS) Neutrals.

Producer discipline needed for coal to return to normalized prices

Regarding coal, the positive impact of improved US coal burn, reduced utility stockpiles and a higher natural gas price deck at times has been offset by continued negative sentiment surrounding global met coal dynamics. While a return to more normalized pricing environment will require producer discipline whose evidence remains shallow, we believe current coking coal prices suggest an output adjustment during 2014. We find the decline in Alpha’s valuation overdone and would add to positions. We rate Arch Coal Inc (NYSE:ACI), Alpha Natural Resources, Inc. (NYSE:ANR), Peabody Energy Corporation (NYSE:BTU), CONSOL Energy Inc. (NYSE:CNX) as Buys and James River Coal Company (NASDAQ:JRCC) and Walter Energy, Inc. (NYSE:WLT) as Neutrals.

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