Several firms are out with defenses on Coal names following yesterday's sell-off:
- Citigroup notes oal has benefited from structural change, with historically isolated/fragmented regional markets linking up and "going global." Mine shortfalls, transport constraints, thin stockpiles, and voracious BRIC-country demand suggest that this process has several years yet to run.
Firm sees the recent 10 - 18% correction in the equities to be excessive, in response to a downtick in European spot from records. This seems profit-taking amid a deteriorating economy, and the "End of the beginning, not the beginning of the end." Met and PRB names should be insulated.
PRB coal is among the last large pools of cheap energy worldwide. They see it as 50 - 60% undervalued relative to C/N.App, while lags are typically 9 - 12 mos. Focus on test burns, exports, CTL/IGCC tech.
Citi is hiking forecasts across major US basins to levels in-line with survey data, with Met benchmarked to seaborne. The PRB is the only area where forecasts are materially above-market. As a result, they are upgrading BTU and ACI to Buy.
- Morgan Stanley says they remain constructive on US coal equities despite the extreme weakness yesterday. Firm believes the case for very strong 2009 domestic thermal coal contracts remains in place. There is potential for further coal price weakness in global and US coal markets following recent strong gains. They believe any further equity weakness in response to softer OTC prices presents an attractive opportunity to build positions, and in particular favorite Overweight–rated names, Alpha Natural Resources (ANR) and Peabody Energy (BTU).
US coal equities have declined sharply,likely in response to a sharp drop in European and US OTC thermal coal prices. MSCO believes the coal price correction represented some profit-taking following the sharp run-up, rather than a change in coal fundamentals. They do not believe the latest $25/ton run to approximately $150 in coal prices was fully priced into the stocks, nor do they think it should have been.
Yesterday's price action does not pose risk to estimates.
Notablecalls: Coal stocks are ready for a bounce this morning, I suspect. Apart from the usual suspects ACI & BTU my favourite of the bunch is Cleveland-Cliffs (NYSE:CLF) due to its exposure to metals. CLF was among the hardest hit yesterday and I feel it will trade back over $100 swiftly.
Deutsche Bank was only 3 days ago out with a call on CLF raising their tgt to $150 from $115. Suspect it is only a matter of time when they come to defend their stance on the name.
