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Obama to turn screws on US coal

THERMAL coal players rocked by the precipitous drop in prices since early 2011 face a whole new i...

Anthony Barich
Obama to turn screws on US coal

Motley Fool energy analyst Tyler Crowe said: “The proposed change would mean that the royalty fee for coal produced on these lands would be applied when coal is sold to an unaffiliated buyer, such as a power company or an exporter, instead of the first intermediary buyer, such as a company that cleans or transports coal. Most of these intermediaries are owned by the coal companies themselves.”

This means the sale price at which the coal's royalty fee is applied will likely be higher, which means the government would get a higher royalty payment and the producer would either have to accept lower margins or increase prices, Crowe said at the weekend.

“With natural gas and renewables becoming economically viable alternatives to coal, the chances of higher prices are pretty slim,” Crowe said.

This is of particular concern for Arch Coal, whose New York-listed stock fell another 22% last month having plummeted a staggering 97% since thermal coal prices started on their downward trend in early 2011.

“For Arch, which produces more than 85% of its coal from federal lands in the Powder River Basin of Wyoming, this change could shrink its already-minimal margins,” Crowe said.

“This news couldn't come at a worse time, either.

“This long lull in coal prices has stretched Arch's balance sheet to the point that it hasn't generated enough EBITDA to cover its interest payments over the past 12 months.”

While Arch Coal does have any major corporate debts due till 2019, Crowe warned that the costs of financing that junk-rated debt would likely continue to weigh on the company’s shares for “quite some time”.

“Somewhere, there's a value investor looking at Arch Coal,” Crowe said.

“Based on the current book value of the company, buying $US1 worth of tangible book value will only cost you $0.13.

“But if you think that's a deal, you really need to ask yourself if this company is going to hang on long enough to see an upswing in coal prices. The last 48 months certainly don't support that idea.”

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