- The Washington Times - Monday, December 4, 2006

The Massey Energy Co. is struggling to mine profitability from its coal business.

Increased production costs, a soft demand for coal and a new breed of board members calling for change have the Richmond-based company looking for new strategies to generate growth.

“Finding strategic alternatives for the company is one thing that Massey’s management must do in the coming year,” said Stephen Marascia, a research analyst for Anderson and Strudwick Inc., a Richmond investment firm.

“The coal companies need to get their production costs under control, and the labor issue is something that feeds into Massey’s production costs,” said Mr. Marascia.

Skilled miners are difficult to recruit because of the dangerous uncertainties of working in underground coal mines.

A fire in one of Massey’s West Virginia mines cost the lives of two Massey employees in January of this year.

Massey operates 31 underground mines and 16 surface mines in West Virginia, Kentucky and Virginia.

Massey’s clients are primarily utility and industrial companies, which use the coal to fuel their power plants.

In August, Massey Energy said that second-quarter profit plummeted 91 percent because the fatal fire prevented the reopening of its West Virginia coal mine. Net income was $3.2 million (4 cents per diluted share) versus $37 million (48 cents) a year ago.

Profits recovered in the third quarter ended Sept 30, rising 7 percent to $24,156 (30 cents) compared with $22,523 (29 cents) a year ago.

“Labor has been one of Massey’s biggest constraints,” said Jim Rollyson, an analyst for Raymond James Financial Inc., a St. Petersburg, Fla., financial services firm.

“The demographics [of the central Appalachian region] have not been favorable for new guys to get into the industry,” said Mr. Rollyson.

In recent years, Massey has increased wages in order to make jobs seem more attractive; however, this strategy has only led to higher production costs.

Alternatively, the company has found some success in hiring migrant workers to dig in the mines.

“Employing migrant workers makes sense; however, the language barrier can sometimes create safety issues in the mine,” said Mr. Rollyson.

Analysts said that changes in the company’s direction will come from the demands of Massey’s more proactive shareholders.

The addition of two Third Point LLC members to Massey’s board of directors will force management to look at more options, said Mr. Marascia.

In August, the company’s stockholders elected two members of Third Point LLC, a New York hedge fund, to Massey’s board.

On Nov. 29, Don Blankenship, Massey’s chief executive officer, said that the company was considering acquisitions beyond the coal industry.

“There’s four or five things they’re looking at,” said Mr. Blankenship. “Everything from acquisitions of synergistic properties to more broad acquisitions to mergers and so forth.”

In addition, the company hired investment banking firm Goldman Sachs in October to review its business.

“There is some value there, relative to their position in the central Appalachian region, and it wouldn’t surprise me to see some mergers or acquisitions,” said Mr. Rollyson.

“But they need to focus on operations first,” he insisted. “They probably won’t see huge growth until they overcome the labor issue.”

The Massey Energy Co. has 22 processing and shipping centers to handle the coal it receives from its coal mines in the central Appalachian region.

Massey also has operations in the Appalachian Basin that produces natural gas and other nonstrategic assets, such as timber, oil and gas rights, surface properties and reserves.

As for coal’s low pricing in the market this year, the Massey has no one to blame but the weather.

“Mild weather has led to a soft demand for electric power,” said Paul Forward, an analyst at Stifel, Nicolaus & Co., an investment banking firm in St. Louis.

Ninety percent of processed coal is used for electric power, and the current decrease in demand has allowed power plants to increase their inventory.

“This is a major reason for why Massey has been down 27 percent this year,” said Mr. Forward.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide