St. Louis-based Patriot Coal (PCX) is a leading coal producer in the eastern U.S., having substantial thermal as well as metallurgical coal reserves in the Appalachian region.
Appalachian coal receives a premium to other regions in the U.S. due to high heat content (i.e. high Btu). Besides producing high-quality thermal coal, this region is known for its metallurgical coal reserves. Additionally, the relative proximity of the Appalachian Basin to the European and the Asian markets further adds to its attractiveness to foreign buyers.
Patriot Coal has handled the challenges arising from a depressed coal market well by rescheduling production plans, idling high-cost mines, optimizing longwall developments and relocating equipment and miners to higher-margin mines. These actions have strengthened the competitiveness of the company and preserved coal assets for a better pricing environment in the future.
Globally, energy prices have started showing initial signs of recovery, in part because of stronger-than-expected economic activities in emerging economies. The present market outlook indicates a sharp rebound in energy demand driven by an economic recovery.
However, a slowed or weaker-than-anticipated global economic recovery, coupled with excess production capacity and soaring inventories, might throw a wrench into the works. We see Patriot shares performing in line with the broader market and thus maintain our Neutral recommendation.
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