Disappointing Quarter for Massey

Massey Energy Co. (MEE - Snapshot Report) − the largest coal company in Central Appalachia, Virginia – announced third-quarter earnings of 19 cents per share, which was in line with the Zacks Consensus Estimate. However, lower coal shipments and prices drove a 69% slump in earnings year over year.
 
Revenues in the quarter plunged 6% year over year to $6.4 billion, reflecting a 15% drop in sales volumes and a 4% decline in prices. Metallurgical coal accounted for 22% of total shipments, down from 24% in third-quarter 2008. According to company estimates, a fire that destroyed a southern West Virginia preparation plant in August curtailed production by 300,000 tons during the quarter.
 
Massey and its peers including Arch Coal Inc. (ACI - Analyst Report), CONSOL Energy Inc. (CNX - Analyst Report) and Peabody Energy Corp. (BTU - Analyst Report) were impacted by the weak coal demand. Demand for coal decreased with lower electric power generation and increased use of natural gas as a substitute for coal in power generation. Massey expects coal demand to drop by about 9% for the rest of 2009 on weak demand from user industries. According to the World Steel Association, global crude steel output declined 18% for the first eight months of 2009 as compared to the same period in 2008. Steel production in the U.S. was down 49% year over year in the first eight months of 2009.
 
However, a 22% year-over-year rise in crude steel production in China in the month of August and a 5% acceleration year to date make Massey optimistic about exports. Massey has also restarted about 40 previously idled facilities, representing over 60 million tons. In addition, natural gas prices have increased nearly 60% since September this year, which is expected to fuel demand for coal for electric power generation.

For the full year, Massey expects coal shipments to be between 37.5 and 38.5 million tons, with average produced coal realization between $63.00 and $63.50 per ton. Average cash cost per ton for the full year 2009 is expected to be between $50.50 and $51.00. For 2010, Massey sees coal shipments of 37 to 41 million tons. Average sales price is, however, expected to increase to $64 to $67 per ton. Massey has about 39 million ton sales contract for 2010. Of this, 33 million tons have been priced at an average of $63 per ton. Massey expects cash costs for 2010 to be in the range of $48 to $51 per ton.

At the end of the quarter, Massey had cash and cash equivalents of $640 million, up 5.4% from $607 million at Dec 31, 2008. Total debt at quarter end stood at $1.3 billion. Debt to capitalization ratio improved to 52.2% from last year’s 53.8%.