Patriot Falls as Forecast Cut on Potential Customer Default

Patriot Coal Corp. dropped the most in three years after cutting a week-old forecast for sales of steelmaking coal mined in Appalachia because of a potential default by a customer.

The shares fell 18 percent to $3.94 at the close in New York, the biggest decline since March 20, 2009, and the lowest price since Dec. 1, 2008.

Appalachian metallurgical-coal sales in the second quarter through the fourth quarter that have already been priced are anticipated to be 3.9 million tons at an average of $142 a ton, St. Louis-based Patriot said in a statement after the close of trading yesterday. On May 8, it projected 4.9 million tons at $138 a ton. On the same basis, Patriot cut its 2013 forecast to 200,000 tons at $122 a ton, from 400,000 tons at $120 a ton.

“The implications for the stock are negative, as current spot prices are well below the prices at which the volumes were contracted,” Lucas Pipes, an analyst at Brean Murray, Carret & Co. in New York who recommends holding the shares, said in a note.

Patriot didn’t identify the “key” customer it said may default. Janine Orf, a Patriot spokeswoman, didn’t immediately return voicemail and e-mail messages seeking comment.

The contract is with a trader for coal for export, most likely to Asia or possibly Europe, Meredith Bandy, an analyst at BMO Capital Markets in Denver, said in a note.

‘Understandably Spooked’

“The market is understandably spooked by the cancellation,” Bandy said. BMO recommends using the weakness to buy metallurgical-coal producers with higher-quality product, according to the note.

Other U.S. metallurgical-coal producers dropped. Peabody Energy Corp. slid 6.8 percent, Alpha Natural Resources Inc. fell

9.4 percent and Walter Energy Inc. declined 6.6 percent.

Moody’s Investors Service downgraded Patriot’s corporate family credit rating to Caa1 from B2 and cut its rating on the miner’s senior unsecured debt to Caa2 from B3. The outlook is stable following the review for downgrade that began May 2, Moody’s said today in a statement.

Patriot said May 8 that “fundamental global market drivers” for metallurgical coal point to “strong” demand and prices in coming years. Patriot also said at the time that it planned to bring back some metallurgical-coal capacity into production this year.|

2011 Sales

Patriot sold 31.1 million tons of coal last year, of which 24 percent went to U.S. and foreign steelmakers, according to a company filing. The rest was thermal coal, which is used to generate electricity. The company said May 8 its 2012 sales volume will be 25 million to 27 million tons.

During 2011, about 78 percent of Patriot’s sales were under contracts to utilities and steelmakers that last a year or more, according to the filing.

Shares of Patriot have fallen 53 percent this year amid a decline in U.S. coal shipments to power stations as some utilities switch to natural gas, which dropped to a 10-year low last month.

Patriot said last month it will idle its Freedom mine in Kentucky, citing weaker demand for thermal coal. In February, the company idled its Big Mountain complex in West Virginia in February, which produced 1.8 million tons of thermal coal last year.

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