Based on the operating conditions through the quarter, Patriot Coal Corporation (PCX) recently provided its revised outlook for the third quarter of 2010. The company said that it sees sales volumes for the third quarter nearly 10% below its previous guidance. Sales volume in the quarter is now expected at 7.5 – 7.7 million tons.
Patriot sees sporadic downtime at its Federal and Panther longwall operations, difficult geological conditions at the Wells and Big Mountain complexes and continued heightened regulatory oversight as the main reasons for this slide in volumes.
Patriot’s Federal mine was recently idled due to the receipt of an imminent danger order from the U.S. Mine Safety and Health Administration (MSHA) relating to a methane level pitching above 5% near the longwall tailgate entry. Continuous miner sections at the Federal mine were not affected by the order and remain in operation.
The shortfall in shipments during the quarter is expected to be evenly split between thermal and metallurgical coal. The company also expects the cost per ton to rise in the quarter primarily due to the fixed cost nature of Patriot's mining operations and also due to the costs being allocated to fewer tons.
Additionally, Patriot expects profits in the quarter to be hurt by a non-cash charge related to the recent judgment on the pending selenium lawsuits received by two Patriot subsidiaries. However, this non-cash charge is not expected to affect the company’s EBITDA for the quarter.
On the positive side, Patriot pointed smooth and timely progress at the start-up of the Black Oak mine in the Rocklick complex, where initial production began in early September. Black Oak mine is expected to produce high-quality metallurgical coal reaching full production in the second half of 2011. The company expects the mine to produce nearly 500,000 tons annually.
Additionally, the company cited that the planned longwall move at the Panther mine is underway with production expected to resume later this month.
St. Louis, Missouri-based Patriot Coal is a leading coal producer in the eastern U.S., having 14 mining complexes in Appalachia and the Illinois Basin. Patriot reported a loss of 15 cents per share in the second quarter of 2010, above the Zacks Consensus Estimate of a loss of 30 cents per share. However, earnings in the quarter slipped below last year’s earnings of 39 cents per share, mainly due to cost inflation at the company’s mines in the Appalachia and Illinois Basin.
Patriot has tackled the challenges of a depressed coal market 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.
However, the company’s disappointing second-quarter results, along with the difficult regulatory environment and increasing mining costs keep us on the sidelines. Consequently, we retain our long-term Neutral recommendation on Patriot. Currently, we have a short-term Zacks #4 Rank (Sell) on the stock.
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