Massey Again In for a Loss - Analyst Blog

Coal miner, Massey Energy Company (MEE) revisited its guidance for 2010 and 2011, and alerted investors of another loss this quarter. The company also said that it expects coal shipments for the third quarter to drop to roughly 10 million tons on account of the difficult regulatory environment faced after the Upper Big Branch mine tragedy.

Updating its 2010 forecast, Massey said it expects operating results in fiscal 2010 to come in at the lower end of its previously announced guidance. Coal shipments in 2010 are now expected to be 39 million tons of coal at an average of $71 per ton, which is at the lower end of its previous guidance of 39 to 40.5 million tons shipments at the expected price range of $71.00 -$73.00 per ton.

Massey was also apprehensive on its cost guidance indicating that it expects costs for 2010 to reach $60 per ton - the high-end of its previous $56-$60 per ton estimate. Depletion, depreciation and amortization expenses in 2010 are expected to be $400 million, including roughly $45 million in amortization of above-market sales contracts acquired with Cumberland Resources.

Massey said that its toned-down guidance was mainly due to the stricter regulatory proceedings by Mine Safety and Health Administration (MSHA) across the company's operations and throughout the Central Appalachian region. The company indicated that these actions have resulted in lost shifts and loss of productivity, ultimately affecting the company's profits. In addition, the company also lost production due to the idling of the Revolution longwall mine for a planned longwall move in June and still remains down pending approval of its ventilation plan by MSHA.

Massey is scheduled to release its third quarter 2010 financial results on October 26, 2010.

Despite this, Massey remains optimistic about meeting its targets post 2010. With the closing of the Upper Big Branch investigation, the company has started to divert its focus toward its ongoing operations. The company continues to initiate actions to improve productivity and re-establish operating consistency across all its mines. Additionally, the company expects a favorable pricing in 2011 given its early negotiations with metallurgical coal customers.

Massey maintained its 2011 guidance of 45 to 51 million tons with an average realized price range of $82.00 and $86.00 per ton. The company's cost guidance of $57.00 - $61.00 per ton for 2011 also remains intact.

Going forward, among the company's anticipated key operational improvements are: the restart of the Revolution longwall mine in the fourth quarter of 2010 producing roughly 1.3 million tons of high quality metallurgical coal annually; the restart of the Sprouse Creek processing plant; bringing the new state-of-the-art Zigmond processing plant on line (designed to process 1,200 tons per hour); and starting production at its Laurel Creek property in the fourth quarter of 2010 or early in 2011, initially producing about 375,000 tons of high quality thermal coal annually.

We maintain our long-term Neutral recommendation on Massey, though the short-term Zacks #4 Rank (Sell) suggests underperformance in the near-term.