Production in Appalachia slips a little every year as old mines are worked out. Output also is limited by transportation bottlenecks. For Appalachian producers, the issue is not how much coal they can mine but how much they can haul out of the mountains on rail lines that are stretched to capacity.
Rising prices, however, have radically improved the economics of mines that were marginal when coal was cheap, resulting in widespread mine-swapping, with millions of dollars made in short order.
Massey Energy properties include this mine in southern West Virginia. The Richmond company's stock has soared.
(Massey Energy Co.)
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That is how the region's two newest coal stocks were created.
Alpha Natural Resources and Foundation Coal are both offspring of First Reserve Corp., a Connecticut buyout firm that teamed up with other high-rolling partners to make the deals.
Foundation Coal used to be the U.S. operations of RAG AG of Germany. Last summer, RAG's mines were bought by First Reserve and the Blackstone Group, a New York investment house, for $975 million, most of it borrowed money. Only three weeks later, the company filed to go public under the Foundation name. The investors put up $200 million of their own money and collected $560 million in a matter of months through the IPO that many analysts considered too pricey.
That's why the stock has not moved up as much as other coal stocks; it closed Friday at $23.32 a share, little above the $22 IPO price. On Friday, Legg Mason rated the stock a "buy" because it has yet to move up along with other coal stocks.
Alpha Natural Resources, on the other hand, got an initial "hold" rating from Legg Mason last week because its stock has climbed from its $19 a share February offering price to Friday's close of $25.98. In the Alpha deal, First Reserve bought mines owned by three other companies and then took them public.
Legg Mason's contrasting ratings -- a "hold" on a hot coal stock and a "buy" on a lukewarm one -- illustrate one issue faced by investors considering coal: Do you buy the leaders or the laggards?
The real question is whether coal stocks have had their run. They've moved up substantially in anticipation of the higher prices and profits that coal producers are starting to deliver.
How much further coal stocks move depends largely on whether the United States can control its insatiable appetite for energy, which is the only way to hold down prices. Coal investors are confident that Americans will not soon trade all their SUVs for hybrid cars or equip all their houses with solar heat.