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 Energy (
), Arch Coal (
) and CONSOL (
) Energy. Earlier this year, Alpha Natural Resources announced
that it had struck an agreement with Massey for a $7.1 billion
We estimate that the produced coal division constitutes around
our $55.08 price estimate for Massey's stock
, which is around 15% below the current market price.
Recently, a federal court for obstruction of justice indicted
Massey Energy's security chief at the Upper Big Branch mine. This
is the mine where the explosion occurred last year. The security
chief has been accused of destroying thousands of pages of
documents that could have aided the F.B.I. and Mine Safety and
Health Administration (MSHA) officials conducting a criminal
investigation of the explosion.
The increased scrutiny from this charge could increased the
costs of regulatory compliance in the future. Massey has been using
public forums to express its differences with the MSHA, its chief
regulator. If MSHA believes it necessary, it can delay coal
production as it did with the delay of the Longwall startup at
Massey's Revolution mine because of disagreements on a new
ventilation plan for the mine. Having a fragile relationship with
the MSHA can lead to increased costs because of increased MSHA
inspections and delays which will could slow down production.
The company's fourth quarter results were impacted due to
reduced production and increased costs resulting from tougher mine
safety standards. Its gross margins fell from 33.6% to 20.1%, with
average cash cost per ton increasing by 26%.
The produced coal EBITDA margin increased from around 13% in
2006 to just over 22% in 2008, as increasing global demand
for coal resulted in higher profit margins for coal producers like
Massey. However, in 2009 as a result of the global economic
downturn demand for coal fell to resulting in EBITDA margins of
around 16%. With the economic environment improving slightly in
2010, its EBITDA margin also improved, and we expect the produced
coal EBITDA margin to increase to around 18% by the end of the
Trefis forecast period.
However, if Massey doesn't improve its relationship with
regulatory bodies, there may be a downside to our forecast. If the
EBITDA margin falls to 15% by the end of our forecast period, it
would have a negative impact of around 10% on our price
estimate for Massey's stock.
See our full estimates for Massey.