Coal Prices slip with soft demand, growing inventories

Coal Prices slip with soft demand, growing inventories

Washington (Platts)--11Jul2006

Overall, coal prices were down last week as prices in the East and West fell,
with demand remaining weak and inventories loosening.

Powder River Basin coal was trading on the spot market at $11/short ton, up
27.9% from last year, but down 15.4% and 7.2% from a month and a week ago,
respectively, due partially to better rail loadings, said Merrill Lynch
analyst David Lipschitz in a report Friday.

Central Appalachian coal was $48.75/st, down 9.3%, 3.0% and 1.5% from last
year, last month and last week, respectively, he noted. Northern Appalachian
coal was $31.40/st, down 11.5% from last year, but up 1.3% versus last month
and last week.

While inventories at utilities remain tight, mild weather through the first
half of the year helped to rebuild stockpiles, he said. "The latest actual
numbers from the [Department of Energy] are for April at 125.2 million st or
51 days of supply. This is 7.8% higher than last year, and 3.5% higher than
our April estimate of 121 million st. We estimate utility inventories at the
end of May were 50 days of supply, or 134.0 million st, 8.5% and 12.1% higher
for days of supply and absolute tons compared to the year ago period. The much
warmer than normal weather in January (the warmest January on record), and the
cool May and June has eased some inventory concerns."

Consol rating lowered to 'Neutral'
Saying short-term coal market fundamentals have softened, Merrill lowered its
rating of Consol Energy stock from "Buy" to "Neutral."

"We are lowering our rating on [Consol] from Buy to Neutral on valuation,"
Lipschitz said in the report. "Although we believe [that Consol's] shares
could continue to perform modestly well for the remainder of the year, we do
not believe that there is enough upside at this time to support a Buy opinion.
In addition, short term fundamentals have softened with the weather in the
first half of the year along with the softness in the natural gas market as
injections, which are well above historical levels, will start to hit capacity
limits."

Consol shares are trading at 18.1 times earnings/share and nine times earnings
value divided by earnings before interest, tax, depreciation and amortization
for 2006 (estimated), and 13.2 times EPS and seven times EV/EBITDA for 2007
(estimated), which is "at the high end of the range for the coal shares we
cover," Lipschitz said. "We do believe Consol should trade at the high end of
the coal sector, but again we feel the shares appear fairly valued."

Lipschitz expects Consol to earn 65?/share during Q2, up from 33?/share a year
ago, but basically flat with earnings of 67?/share in Q1. "We reiterate our
estimates of $2.60/share and $3.60/share for 2006 and 2007, respectively.
Year-to-date, [Consol] shares are up more than 45%, and 25% over the last two
weeks, outperforming the coal sector, which is up 22% year to date and the S&P
500, which is up 1.8% year to date."

"While we believe that we are undervalued, this type of downgrade is not
because the analyst does not like the company, but because we have hit or are
close to hitting his targets," Consol Vice President of External Affairs
Thomas Hoffman told Platts Monday.

In late Monday trading, Consol was at $44.90/share, down 34? from Friday's
close. The 52-week high was $49.09/share and the low, $26.80.

Lipschitz also reiterated his "Buy" rating on Arch Coal. Merrill remained
"Neutral" on Alpha Natural Resources, Foundation Coal, Massey Energy and
Peabody Energy.

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