UPDATE 4-Patriot Coal's focus on met coal proves costly; shares down

* Q2 loss $0.14 vs last yr $0.15

* Q2 rev $623.9 mln vs last yr $533.8 mln

* Shares down 12 pct (Adds pricing outlook in para 7,8,9, updates shares)

By Vaishnavi Bala

BANGALORE, July 26 (Reuters) - U.S. coal miner Patriot Coal Corp warned mining for metallurgical coal would be costlier than expected this year, sending its shares down 12 percent.

Patriot is aiming to boost the contribution of met coal, or steel-making coal, to 35 percent of total production at the end of the year, compared with 30 percent at the start, to tap into the strong Asian markets, especially India and China.

St. Louis, Missouri-based Patriot, which on Tuesday reported its 12th straight quarterly loss, said the cost of bringing three new met coal mines into production, higher sales-related expenses and labor costs would raise its production costs.

"We've been forecasting higher cost for coal companies, but Patriot has been above our high end cost-wise. So if people did not expect that, it is disappointing," Iberia Capital Partners analyst David Beard said.

Last week, bigger peer Peabody Energy Corp posted strong quarterly results on higher export prices and said it expects higher volumes and strong prices for the met coal it exports from Australia.

Met coal prices rose due to the floods in Australia, but prices have stagnated since, and averaged $315 per ton in the second quarter. As the Australian mines restart, prices will likely drop off but demand is expected to stay strong.

Patriot said contracted selling prices for met coal was expected to be $151 a ton for the rest of this year and through 2012, down from the $156 a ton it has forecast last quarter.

"In the long run, the company should be able to make some money but again since costs are high now, and we don't know what they are going to be like in 2012 and further," Beard said.

"It sounds good but what happens if you don't get that high profits. So that kind of worries people."

With supply constraints worldwide, Patriot expects U.S. met and thermal coal be increasingly be shipped overseas, with miners in the eastern coast particularly well-positioned to grow in the export markets.

Patriot Coal shares were trading down 11 percent at $21.56 in Tuesday afternoon trade. The broader Dow Jones US Coal Index was down 2.5 percent.

HIGHER MINING COSTS

Mining costs in the Appalachia basin rose 15 percent to $68.85 a ton the second quarter, higher than the company's forecast of $63-$67 a ton. Costs in the Illinois basins inched up to $43.70 a ton, a shade over its forecast.

Patriot now expects full year costs in Appalachia to be just over $70 a ton, while its raised its cost forecast for the Illinois basin to be $42-$44 per ton.

Brean Murray, Carret & Co analyst Jeremy Sussman said while the company's costs were disappointing, margins were expanding.

The company expects sales volume of 31-32 million tons, including met coal sales of at least 8 million tons, in 2011 and said it had contracted an additional 400,000 tons of met coal for delivery in 2011.

"Given its significant and growing leverage to the met coal markets, we remain buyers of Patriot, especially on potential weakness today," Sussman said.

Patriot, which plans to export about 25 percent of its 2011 production, said a 16 percent rise in selling prices helped it narrow its third quarter loss.

For April-June, it's loss narrowed to $12.3 million, or 14 cents a share. Revenue rose 17 percent to $623.9 million. (Reporting by Vaishnavi Bala in Bangalore; Editing by Gopakumar Warrier, Saumyadeb Chakrabarty, Savio D'Souza)