Despite impressive second quarter 2011 results for Patriot Coal Corporation ( ) , expectations of higher costs at the company’s mining operations keep us on the sidelines. We maintain our Neutral recommendation on Patriot.

Patriot Coal’s second quarter earnings of 13 cents per share beat our estimates of 10 cents per share. Patriot’s bottom line results were slightly affected by costs, while robust sales volumes and prices led to the beat. The company’s quarterly revenue of $632.2 million was also above the Zacks Consensus Estimate of $612 million.

Going forward, we expect Patriot to benefit from its met coal expansion plans. Patriot continues to actively manage its strategies to further improve performance in 2012 and beyond. As a result, the company is continuously looking to lock in excellent margins by selling its expected met coal production at attractive prices.

Further, forecasts continue to indicate the sustainability of coal market globalization, which point to a substantial rise in the demand for metallurgical as well as thermal coal over the next several years. We expect these factors to instill a positive earnings trend for Patriot going forward.

However, as a negative sign, the company expects costs to be higher at its mining operations as new met mines enter production, which may impact the company’s earnings forecasts. Costs for full-year 2011 in both Appalachia and Illinois regions are expected to be significant.

Moreover, the coal mining industry remains extensively regulated, which poses difficulties in obtaining mining permits at various stages. This may impact the company’s earnings in the long term.

St. Louis, Missouri-based Patriot Coal currently has a short-term Zacks #3 Rank (Hold rating). The company’s peers Penn Virginia Resource Partners L.P. ( PVR - Analyst Report ) and Alliance Holdings GP L.P. ( AHGP - Snapshot Report ) with a Zacks #2 Rank (Buy rating), are better ranked, based on short-term ratings.