Coal miner, Massey Energy Company (MEE) reported operating earnings of 28 cents per share or $28.5 million, missing the Zacks Consensus Estimate of 58 cents per share. Operating earnings for the quarter excluded one-time charges related to the Upper Big Branch (UBB) mine disaster, loss on derivative instruments and transaction costs related to the proposed merger with Alpha Natural Resources Inc. (ANR).

On a GAAP basis, Massey Energy continued its loss-making trend in the first quarter 2011 as it struggles to recover from the April 2010 Upper Big Branch incident. The company posted a net loss of 7 cents per share, on a GAAP basis, in the just-ended quarter compared to a net profit of 39 cents in the year-ago quarter.

Revenue

Net revenues in the first quarter jumped 37.9% year over year to $949.8 million, mainly due to higher volumes sold, together with better realizations for metallurgical as well as utility coal shipped in the quarter. The company’s revenue in the quarter was also above the Zacks Consensus Estimate of $910 million.

Operating Results

In the first quarter, Massey Energy produced and sold 10.3 million tons of coal compared with 8.5 million in the year-ago quarter, implying a growth of 21%.

During the quarter, shipments of utility coal increased by 37% from the year-ago period and represented 69% of total tons shipped compared to 61% of the total in the first quarter 2010.  Massey’s total met coal shipments declined by 4% year over year, mainly due to lost production from UBB.

However, the total coal exports for Massey increased 36% from last year to 2.3 million tons. The company’s met coal exports rose 10% from first quarter 2010, driven by strong overseas demand for mid-vol coal blends and mid quality high-vol coals.

Average produced coal revenue was $80.96 per ton (or $831.3 million) in the reported quarter, an increase of nearly 20% from $67.38 per ton (or $571.8 million) reported last year. The improvement was mainly driven by a 12% rise in realized utility coal prices and a 53% increase in realized metallurgical coal prices during the quarter. 

Average cash cost per ton for the first quarter was $66.04, increasing 19.2% from the year-ago quarter, mainly on account of higher fixed cost absorption on lower than planned production, higher sales related costs linked to higher average sales prices and increased costs for mining supplies and labor. 

Liquidity

As of March 31, 2011, Massey Energy had cash and equivalents of $280.7 million compared with $327.2 million at year-end 2010. The company had $122.8 million available under its asset-based revolving credit facility for a total liquidity of $403.5 million as of March 31, 2011.

Debt and Capital Resources

Massey Energy had a total debt of $1.319 billion as of March 31, 2011, with a total debt-to-book capitalization ratio of 42.4%.

Total capital expenditures in first quarter 2011 were $100.8 million compared to $56.1 million in the first quarter 2010. Massey’s significant capital projects for the quarter included continued development at the Marianna property where it is constructing a new preparation plant and a new low-volatile metallurgical coal mine, the development of two new mines in the Pocahontas #3 seam near the new Marianna plant and the start-up of a new mine in the Sewell seam at the company’s Guyandotte operation.

Guidance

Massey Energy expects produced coal shipments for 2011 in the range of 41 to 44 million tons with an average realized price range of $83.00 – $86.00 per ton.

For fiscal 2011, Massey has commitments for sale of 41.9 million tons of coal, including 37.8 million tons that are sold and priced at roughly $79.00 per ton.  The sold and priced tons include 7.1 million tons of metallurgical coal.  Massey now expects metallurgical coal shipments for 2011 in the range of 10 to 13 million tons.

Massey increased its average cash cost per ton guidance for 2011 to be in the $64.00 – $67.00 range, driven mostly by higher-than-expected increases in costs for mining supplies, including diesel fuel, explosives and steel products. Other income is guided at $20 – $100 million for 2011.

Capital expenditure for 2011 is expected in the $400 – $550 million range. DD&A is expected to be nearly $380 million for 2011 with about $56 million from the amortization of acquired sales contracts and other intangibles.

For fiscal 2012, Massey has commitments for coal shipments of 28.9 million tons. Of these, 18.7 million tons are sold and priced at roughly $71 per ton, including about 1.1 million tons of metallurgical coal.

Our Take

We remain positive regarding the progress Massey Energy has shown in improving its operations and bringing shipments back in line with expectations. However, we would like to see the company bring down costs in order to improve net profitability.

We also favor Massey’s pending acquisition, a $7.1 billion takeover by Alpha Natural Resources, which is scheduled to close after shareholders vote on June 1, 2011. We believe the Massey-Alpha merger is going to prove beneficial for both companies, as the merged entity will become America’s largest supplier of metallurgical coal for the world’s steel industry and a highly diversified supplier of thermal coal to electric utilities in the U.S. and overseas.

Massey Energy currently holds a Zacks #3 Rank (short term Hold). We retain our long term ‘Neutral’ rating on the stock.

 
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