October 27, 2009 / 11:24 AM / 10 years ago

UPDATE 3-Patriot Coal sees thermal coal demand spike; shares up

* Q3 adj loss/shr $0.45 vs est loss/shr $0.47

* Total revenue rose 3 percent to $506.2 mln

* Sees domestic thermal coal demand rise over 6-9 mths

* Sees hard-pressed supply driving up prices

* Shares rise 25 percent (Recasts; adds conference call, analyst’s comments, share price)

By Antonita Madonna Devotta

Oct 27 (Reuters) - Patriot Coal Corp PCX.N, which reported a narrower-than-expected quarterly loss on higher sales and prices for steelmaking coal, said it is certain about a quick recovery in the coal markets, sending its shares up to a new high this year.

Coal miners in the United States have been hit hard by delays in the issuance of mining permits and falling industrial electricity demand. The only bright spot for the industry has been a recent uptick in demand for coking coal used in steel manufacturing.

However, Patriot’s Chief Executive Richard Whiting said he expects domestic thermal coal demand to rise significantly over the next six to nine months.

Whiting said natural gas pricing in 2010 could make utilities return to the normal level of coal-fuelled plants to generate electricity.

“This alone could result in a 20 million to 40 million ton increase in thermal coal demand in 2010.”

Whiting’s comment pleasantly surprised the market as it marks the first clear indication of a rebound in demand for thermal coal.

Shares of the company rose as much as 25 percent to $14.07 before losing some gains to trade up $1.96 at $13.15 Tuesday afternoon on the New York Stock Exchange.

“We believe the (coal) markets are at an inflection point poised to see a substantial improvement in demand in 2010 in both metallurgical and thermal coal... I am now more optimistic that the timeline is within our near-term sight,” Whiting said.

However, the CEO expects the rebound in markets to coincide with hard-pressed supply, especially in Central Appalachia, as the Environment Protection Agency’s delay in issuance of surface mining permits and the decision to review issued permits will lead to a meaningful reduction in tons.

Production from surface mines account for about two-thirds of Central Appalachian coal production, the CEO said.

“It is going to be a sort of a mixed-bag for Patriot,” analyst Meredith Bandy of BMO Capital Markets said.

“The EPA is making production in Central Appalachia much more difficult and supply more constrained than it otherwise would be. That is a positive for pricing of any commodity,” she said.

MET COAL DOMINANCE TO CONTINUE

“We continue to see signs of strength in the metallurgical coal market, as domestic steel mill utilization has improved. We expect this market to continue to strengthen throughout 2010,” Whiting said in a statement.

Patriot said metallurgical coal volumes for the quarter were up 50 percent over the second quarter, while costs were down by more than $5 per ton, as customers took more consistent delivery of contracted tons. Further cost improvements are also expected.

“Because of the limited availability of high-quality met coal in the world, our forecasts show demand outstripping supply and therefore driving up met pricing as we move into and through 2010,” Whiting said on the call.

Patriot also said it signed its first commitment to ship high-volume met coal to China.

NARROWER-THAN-EXPECTED LOSS

For the third quarter, the company posted net income of $52.8 million, or 58 cents a share, compared with $71.2 million, or 99 cents a share, a year ago. Excluding sales contract accretion, quarterly loss was 45 cents a share, while analysts on average were expecting a loss of 47 cents a share, according to Thomson Reuters I/B/E/S.

Accretion related to shipments on below-market sales and purchase contracts obtained in the Magnum Coal acquisition in July 2008 totalled $94.0 million in the third quarter. (Additional reporting by Thyagaraju Adinarayan; Editing by Vinu Pilakkott, Saumyadeb Chakrabarty)

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