Editorial: Goin’ down, down

Working in a coal mine in the U.S. these days involves not only staying focused on getting your job done, but also wondering whether the company you work for can pay its bills and remain a viable concern.

The industry was booming as recently as 2011, after coal prices recovered following the 2008 downturn. But now it’s back in bust territory, and debt-crushed coal miners are teetering on the financial cliff.

First over the edge is Peabody Energy’s 2007 spinoff Patriot Coal, which surprised many observers by filing for bankruptcy protection on July 9.

Patriot’s shares have been booted off the New York Stock Exchange and are trading over-the-counter at US21¢, after having traded around US$1.20 a week earlier, and at a 52-week high of US$24.99 in July 2011. In 2008, the stock traded at the equivalent of US$41 for a time.

It’s one of those mysteries of stock trading that Patriot’s common shares aren’t valued at zero today, as they will undoubtedly be cancelled when the company re-emerges from bankruptcy protection in a year or two.

Perhaps most shocking of all, with 92.9 million shares outstanding, Patriot has seen its market capitalization steadily erode from a robust, elite-level US$2.3 billion a year ago to today’s US$21 million, or a 99% decline in 12 months.

Patriot operates 12 coal-mining complexes in Appalachia and the Illinois basin, and the company and its predecessors have operated mines in these regions for more than 50 years. In 2011, it sold 31.1 million short tons of coal, of which 76% was sold to domestic and global electricity generators and industrial customers, and 24% to domestic and global steel and coke producers.

Patriot looks to have been taken down by several converging negative trends: falling thermal and met coal prices owing to the sputtering domestic and global economies, a glut of oil and natural gas for domestic power production, too-high debt, and tightening environmental restrictions on U.S. coal-fired power plants, which still produce around half of the country’s electricity.

By July 10, Patriot had lined up a US$802-million debtor-in-possession financing that will allow it to continue mining operations and pay employees’ wages and benefits.

Immediately before the bankruptcy protection filing and latest financing, Patriot had about US$444 million in total debt and US$115 million in total cash.

Sadly, Patriot’s quandary is typical of many of its competitors in the U.S. coal space, who are facing waves of downgrades by bond-rating agencies: James River Coal, with its US$100-million market cap, has US$586 million in total debt and only US$169 million in total cash; Alpha Natural Resources has a US$1.7-billion market cap, US$3 billion in debt and US$589 million in cash; and goliath Arch Coal, with its US$4.1-billion market cap, has US$4.1 billion in debt and just US$118 million in cash.

James River is already being fingered as the next U.S. coal miner likely to sink into bankruptcy protection, and the more bearish coal watchers think Alpha and Arch will succumb sooner or later, too.

One group suffering collateral damage from the latest coal troubles are the Energy ETFs, which have already taken a bath this year on weakness in oil and gas prices, as well as the well-publicized failures in the clean-energy subsectors of wind turbines and solar panels.

This is a ripe time for the coal survivors to pick up major coal assets on the cheap. Industry leader Peabody Energy, though plumbing new 52-week lows like the rest of the coal miners, looks to be sitting pretty after record revenues and profits in 2011. Today, its US$6.7-billion debt load is manageable, considering that it’s pulling in US$2.5 billion in profits annually and has mostly long-term sale contracts. Indeed, the stock looks cheap considering its price-to-earnings ratio is only 6.5. Equal-sized U.S. energy titan Consol Energy is also in relatively good financial shape, though hobbled by its much more sizeable natural gas business, which limps along under today’s ultra-low gas prices.