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As Coal Prices Rise, So Do Coal Stocks

Crude futures briefly topped $58 a barrel a week ago today, then fell five days in a row, demonstrating that the market has been hijacked by speculators whose whimsical trading bears little relation to long-term energy price trends.

Coal prices are more stable because most coal is sold under long-term contracts with electric-utility companies and steelmakers.

Massey Energy properties include this mine in southern West Virginia. The Richmond company's stock has soared. (Massey Energy Co.)

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As a result, coal-company profits lag coal prices but are expected to keep growing as supply contracts expire and are renewed at higher prices. Those higher prices are starting to kick in this year and are projected to boost coal profits even more next year and the year after.

Anticipating higher prices and profits ahead, coal stocks "started to move when the price started to move" in the fall of 2003, Khani said. Now investors are "trying to anticipate how long this price move will last and how far it will go up."

Khani rates Massey Energy as his "top pick" coal stock.

Katherine W. Kenny, Massey Energy's director of investor relations, said the company got an average of $36 a ton for coal last year, will get $40 to $42 a ton this year and expects $50 to $52 a ton in 2006.

The biggest increase has been in the price of coal used to make steel. Known as metallurgical coal, or just "met coal," the pure, clean, high-carbon coal sold for $35 a ton 18 months ago. Now it's going for as much as $90 a ton. The "steam coal" burned in power plants is selling in the high $50s.

"The key for us is the met-coal market," Kenny said. "We are considered the met-coal play."

That's because Massey is the biggest coal producer in the East, where most of the nation's met-coal deposits are found. Met coal accounts for 25 percent of its total production.

For most commodities, higher prices quickly result in higher production, but that can't happen with Eastern coal.

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