Coal and natural gas producer, CONSOL Energy Inc. (CNX) has decided to temporarily shut down its southwest Virginia Buchanan Mine longwall mining unit and has also planned to reduce its continuous mining operating schedule to five days per week. As a consequence, CONSOL’s monthly production will be reduced by approximately 295,000 tons per month.
The company however reassured that there would be no layoffs but added overtime and other non-essential work will be delayed as a result of the temporary shut down. The company has not indicated any timeframe for the closure.
The move to shut down the mine comes from muted international demand for metallurgical coal along with elevated inventories. Moreover, electric companies have been switching from coal to cheap natural gas to fuel their power plants which has put coal producers in a tight spot.
This is the second consecutive closure for CONSOL in one week. In the last week of February, the company had temporarily shut down its Northern West Virginia Blacksville No. 2 longwall mining unit and had also planned to reduce its continuous mining operating schedule to four days per week. Monthly production from this closure would go down by roughly 400,000 tons per month.
The company also updated its expectations for the first quarter of 2012. It expects low and high-volatile metallurgical coal sales to be approximately 1.0 million tons each. However, responding to market conditions, the company lowered its expectation for thermal coal by a few hundred thousand tons versus its previous guidance of 13.2 million tons.
The company will provide its full year production and sales guidance for 2012 later. However, at its earnings call in January this year, CONSOL had indicated that it expects coal production to be in the respective range of 15.5–15.9 million tons and 59.5 − 61.5 million tons in the first quarter and full year 2012. Given the scenario, we however do not expect the company to meet the guidance.
At the macro level, the share price of coal companies declined, as concerns regarding a global downslide in coal demand deepened after China lowered its economic growth forecast. This week, China lowered its economic growth target to 7.5% from 8% to keep inflation under control.
In the last week, the share price for CONSOL fell by 8.2% to $32.90. Similarly, share prices for its peers, Arch Coal, Inc. (ACI) and Peabody Energy Corporation (BTU), took a beating by 11.7% and 11.9%, respectively.
Despite the raging headwinds, CONSOL’s deep and diversified portfolio, along with its low-cost coal production capability, puts it at a relative advantage compared to its peers. However, dependence on a small group of consumers for bulk sales, rising cost of coal production along with stricter legislations and rigid penalties on underground mining, remain concerns for underground miners like CONSOL Energy. The company presently retains a short-term Zacks #3 Rank (Hold) rating.
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