) reported first quarter FY11 earnings earlier this week. Net
revenues for the quarter increased 38% compared to the same period
last year. The produced coal segment, which has the largest share
of net revenues and accounts for 82% of our stock value, increased
revenues by 45%. Massey Energy is the 4th largest coal company in
the United States and the largest in Central Appalachia based on
produced coal revenue. Massey competes with companies like Peabody
), Arch Coal (
) and CONSOL Energy (
Revenues Up & Margins Down
The increase in produced coal revenues were driven by increases
in both tons of produced coal and the average revenue per ton, both
of which increased by around 20% year on year (y0y).
However, the company's profit margins were down considerably
largely driven by an increase in average cash cost per ton of coal
sold, which increased almost 20% yoy. The increase in cash cost per
ton was due largely to fixed costs being spread over lower than
expected production, as well as higher sales related costs related
to higher average sales prices. This was further compounded by
increasing costs for mining supplies and labor. However, the
company believes that it can achieve cost improvement as the year
The considerable increase in revenue per ton was driven by
improving market prices with prices for metallurgical coal and
industrial coal shipped in Q1 2011 increasing 53% and 12%,
respectively. Going forward, prices for the different grades of
coal should continue to increase.
Coal Sold to Utility Customers Expected to
We estimate that the produced coal division constitutes around
our $63.19 price estimate for Massey's stock
, which stands slightly below the current market price.
In the produced coal division, Massey derives maximum value from
selling coal to utility customers, which we estimate constitutes
around 46% of its stock price vs. selling coal to metallurgical
customers and industrial customers which constitute 28% and almost
9% respectively of our stock price estimate.
The produced tons of coal sold to utility customers was not
greatly impacted during the recent economic downturn, decreasing
only 10% between 2005 and 2010. However, in Q1 2011, it increased
considerably at 36.5% yoy with demand for coal getting a boost as
we moved out of the economic downturn.
Going forward, we expect it to increase to nearly 35 million
tons by the end of our forecast period from 26 million tons in
2010, an annual growth rate of around 4.3%. However, if it
increases 2 percentage points faster average at 6.3% per year to
reach around 40 million tons by the end of our forecast period,
there can be an upside of nearly 10% to our current price estimate
for Massey's stock.
See our full estimates for Massey.