UPDATE 3-Massey sees higher prices for metallurgical coal

(Adds analyst comment, background, share price higher)

By Steve James

NEW YORK, April 4 (Reuters) - Coal miner Massey Energy Co (MEE.N) said on Friday it expects prices for coal used in steel making to be significantly higher than previously forecast and is raising spending to take advantage of the opportunity.

Massey shares rose more than 16 percent to their highest level in 2-1/2 years on the news the company expects 2008 metallurgical coal prices to be as much as 17 percent higher, with further increases in 2009 and 2010.

"I am not surprised pricing and production estimates are coming up," said Jeremy Sussman, a coal industry analyst with Natixis Bleichroeder. "The level of increase (by Massey) is quite high relative to their hedging."

Sussman said Massey's production was more hedged than some of its rivals, but he estimated the Richmond, Virginia-based company had 1 or 1-1/2 million tons of this year's met coal left to sell at the higher price and about 6 million tons of 2009 production still unpriced.

In its announcement, Massey said it sees 2008 prices for met coal at $61 to $63 a ton, up from its previous projection of $54 to $56. For 2009, it expects pricing of $65 to $74, up from its previous view of $57 to $59.

Massey forecast 2010 met coal prices at $75 to $87 a ton, compared with its previous estimate of $64 to $66. The company also expected its met coal shipments to be about 2 million tons higher than previously forecast for 2009 and 2010.

"The extremely strong metallurgical coal market is the primary driver of our average price increase," said Chairman and Chief Executive Officer Don Blankenship.

World demand for metallurgical, or coking coal, is soaring right now, driven by China's appetite for steel for its industrial growth. The price has further increased because supply has been constrained as a result of recent floods in Australia affecting exports to Asia.

Just this week, Lakshmi Mittal, the head of the world's largest steelmaker, ArcelorMittal (ISPA.AS)(MT.N), said he expected the benchmark coal price to rise 150 percent to 200 percent when contract prices are set soon.

And industry sources told Reuters that BHP Billiton Ltd (BHP.AX), the biggest producer and exporter of Australian coking coal, is seeking $300 a tonne free-on-board for term supply in 2008/2009 to Japanese steel mills. This represents a price increase of over 210 percent from last year.

Coking coal is in such tight supply it would not be an exaggeration to call it an actual shortage, producer sources said recently. Spot cargoes of coking coal have been sold recently at prices as high as $350 a tonne.

Massey said it was raising its capital spending budget for 2008 by $90 million to accelerate its expansion project, bringing the total to about $550 million. That includes an investment of about $310 million to expand coal mining operations in the Central Appalachia coal fields of Kentucky, Virginia and West Virginia.

Massey also said its first-quarter coal production fell about 6 percent to 9.9 million tons, while shipments for the period declined 3 percent to 9.6 million tons. It estimated average produced coal revenue -- both metallurgical and steam, which is used in power plants to generate electricity -- at $55.50 to $56 per ton.

Massey shares were up $6.68, or 16.75 percent, at $46.56 in afternoon trading on the New York Stock Exchange. (Additional reporting by Michael Erman; Editing by Lisa Von Ahn/Andre Grenon)