James River Coal Company: A lump of coal for the minting

Jennifer Schonberger | May 09, 2008 5:25pm EDT | Comment

Rating: Unrated [rate it]

James River Coal Company (Nasdaq:JRCC)
Richmond, Va.
http://www.jamesrivercoal.com

52-week low/high: $3.56/$31.99
Shares Outstanding: 25.32 million
Market Capitalization: $788 million

Christmas may be a ways away, but it’s what we do all year that determines whether Santa leaves a lump of coal or presents in our stockings. Receiving a lump of coal this year, though, may not be all that bad.

The domestic coal industry is expected to play a strong role in meeting the world's demand for coal, and one way to profit off that is through James River Coal Company (Nasdaq:JRCC), a Richmond, Va.-based steam and industrial grade coal producer that sells coal to electric utilities and industrial customers.

The outlook for domestic and international coal markets remains robust for the foreseeable future. Underlying demand for coal from developing economies in several regions of the world is continuing to grow faster than the industry can grow international supply. Spot prices for a ton of coal are rocketing. Just this week, a ton of coal over-the-counter was going for $100 for 2008, while prices for 2009 are over $90 and prices for 2010 are between $85 and $90. This compares with an average spot price of $55 in 2007. Domestically, inventory in the mid-Atlantic region is tight, while the southeast region is growing progressively tighter. James River is positioning itself appropriately.

The small cap has a new strategy on tap for coal contracts. The company plans to use its remaining open tonnage in 2008 as part of a package for customer requirements for longer-term contracts. Thus far, James River has been able to capitalize on the stronger coal markets by adding to contract positions for 2009 and 2010. The company said it would like to have a total of approximately 4 million to 5 million tons of expected 2009 production and 2 million to 3 million tons of expected 2010 production under contract by late July.

The company had a bit of downer first quarter; however, it was owed mostly to one-time items and outside forces such as unusually severe rain, new regulations and commodity related cost inflation. James River clocked a net loss of $16.7 million, or $0.78 per share for the first quarter of 2008, widening from a net loss of $7.3 million or $0.46 per share for the first quarter of 2007. That’s not to say the company has shrugged off these systematic factors — it has taken steps to adjust its mine portfolio to the new regulatory and cost environment. Additionally, weather patterns have returned to normal and its Triad mine located in southwestern Indiana has returned to expected production levels.

After earnings were reported on Tuesday, the stock climbed some 10% — a good sign despite the down quarter.

Going forward, James River plans to streamline costs and pay down debt, as it transitions from costly deep underground mines to lower-cost surface-mining operations.

Analysts have upwardly revised estimates for fiscal 2008 and 2009 and are purporting sales will grow 19% in 2008 and 22% in 2009. UBS upgraded James River to a “buy” from “neutral” on April 30, while Raymond James upgraded it to “outperform.” The company trades at a price-to-sales ratio of 1.21 while the industry has a P/S of 3.26.

Remember the advantage individual investors have over Wall Street institutions is that they can ride investment trends for the long haul. The market for coal is exhibiting favorable long-term trends that individual investors can capitalize on, while Wall Street is driven by short-term returns. James River Coal could be the investment vehicle for that scenario.

For more on James River Coal Company, read our spotlight on the company.

Note: James River Coal Company (Nasdaq:JRCC) is on the “Watch List” of Rising Star Stocks, a subscription investment newsletter from Business Financial Publishing, which also publishes SmallCapInvestor.com. As a Watch List company, James River displays many characteristics found in successful stock winners, and is being closely monitored for possible inclusion in the Rising Star Stocks portfolio at a later date.