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Mine Explosion Dampens Massey's Growth Plans

Friday, 09 April 2010 12:30 PM

Massey Energy could see where the demand for coal was coming from. So, it made a $1 billion bet that it could cash in on the burgeoning economies of Asia.

Now, the deadly explosion at one of its mines in West Virginia could hamper its expansion plans, be a drag on earnings and bring additional scrutiny for a coal miner already accused of putting profit ahead of workers' lives.

Monday's explosion at the Upper Big Branch mine in Montcoal, West Virginia, killed 25 miners. Four others are missing in what is the worst U.S. mining disaster since 1984.

By one estimate, the lost of production from the mine could cost Massey up to $50 million in earnings. A two-day selloff in Massey's stock wiped out about $820 million in market value. This comes as slack demand and the threat of tougher regulation at home forces U.S. coal mining companies to pour money into overseas expansion.

The Upper Big Branch mine produces metallurgical coal used by steel makers. That kind of coal generates bigger profits than the more common thermal coal used by utilities to make electricity.

The Chinese and Indian economies have rebounded from the recession much faster than other parts of the globe. Both countries need to import metallurgical to make steel for cars, bridges and appliances used to feed their growing economiesThat demand has pushed up prices for metallurgical coal to about $200 per ton, double from where they were a year ago.

So, while demand in the U.S. remained suppressed, Massey embarked on an expansion to double theits production of metallurgical coal by 2012 to 20 million tons.

Massey, based in Richmond, Virginia, announced last month that it bought rival Cumberland Resources for $960 million. It also wants to invest $160 million to develop a southern West Virginia operation capable of producing 2 million tons of metallurgical coal annually. And it has agreements to work on coal projects with two Indian steel companies.

"We believe the current and forecasted shortage of metallurgical coal makes this the right time to bring on additional production," Massey's Chairman and CEO Don Blankenship said when the company released its fourth-quarter financial results in February.

The fate of the Upper Big Branch mine, which produces about 1.2 million tons of coal a year and represents about 3 percent of Massey's coal sales in 2009, is unclear. It will shut down for at least a few months while federal investigators determine what happened.

"I wouldn't expect it to be significant in the long term," Blankenship told The Associated Press Thursday.

"We haven't focused on that because that's not the important thing now."

Still, it does figure to slow the company's big plans to take advantage of overseas demand for coal.

Besides the shutdown of the mine, the explosion will draw additional scrutiny from inspectors and that could hinder production at other Massey operations where there already are complaints about unsafe conditions. The company's mountaintop mining practices also have drawn criticism from environmentalists.

Ratings agency Standard & Poor's pegged the loss of production at $50 million a year to earnings before income taxes, depreciation and amortization and said Massey is likely looking at a near-term expense of under $10 million.

Massey's stock was hit hard on Tuesday and Wednesday, falling 17 percent, wiping out $819.8 million of market value. It rose 2 percent on Thursday.

Other mining companies hit with similar situations have continued to do well. Some have permanently closed the mine where the disaster happened; in other cases the mine ultimately reopened.

International Coal Group closed the Sago mine in Buckhannon, West Virginia, after 12 workers were killed in an explosion in 2006. The company said the mine was no longer viable and recorded a $7.2 million charge.

The Crandall Canyon mine in Utah operated by a subsidiary of Murray Energy shut down after a cave-in killed six miners and three rescuers in 2007.

In 2006, two miners were killed in a fire at Massey's Aracoma Alma No. 1 mine in West Virginia. Massey settled a wrongful death lawsuit for an undisclosed sum, and its subsidiary paid $4.2 million in civil and criminal penalties. That mine reopened.

"All these situations are different," said Carol Raulston, spokeswoman for the National Mining Association.

As one of the nation's biggest coal producers, Massey may be able to count on other mines to make up for the production at Upper Big Branch. Insurance can mitigate costs.

The explosion comes at a difficult time for coal mining companies.

The recession has sapped demand for coal. Utilities are using more cheap natural gas to produce power. And Congress is studying proposals that could limit emissions of greenhouse gases, which could further dampen demand for coal.

After hitting a record in 2008, coal production in the U.S. fell 8.5 percent last year to 1.07 billion tons, the largest percentage decline since 1958 and the biggest tonnage drop-off since 1949, according to the Energy Information Administration.

That is why companies are counting on emerging markets in Brazil, India and China to boost profit, said steel industry analyst Charles Bradford of Affiliated Research Group.

"Domestic coal miners are pretty about good sensing where there is a market," he said.

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Massey Energy could see where the demand for coal was coming from. So, it made a $1 billion bet that it could cash in on the burgeoning economies of Asia.Now, the deadly explosion at one of its mines in West Virginia could hamper its expansion plans, be a drag on earnings...
Friday, 09 April 2010 12:30 PM
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