Coal Stocks on a Roller Coaster Ride That They Can't Get Off

  • U.S. coal company stocks most volatile since March 2010
  • Arch Coal, Peabody shares ended a 2-week rally on Tuesday

U.S. coal stocks are on their bumpiest ride in five years.

The historical volatility of U.S. coal shares has reached the highest level since March 2010. After falling more than 90 percent, miners including Arch Coal Inc. and Peabody Energy Corp. touched off a two-week rally that abruptly ended Tuesday when they slid as part of a wider sell-off in the stock market. A Bloomberg Intelligence index of U.S. coal companies was up 3.2 percent Wednesday.

The volatility of U.S. coal stocks is at the highest level since March 2010 as investors wager whether they can survive an unprecedented downturn.
The volatility of U.S. coal stocks is at the highest level since March 2010 as investors wager whether they can survive an unprecedented downturn.

The roller-coaster ride comes as investors are handicapping whether coal miners can survive the industry’s worst downturn in decades, making them incredibly sensitive to incremental news.

“There’s so much leverage on these guys, and so much uncertainty on what’s going to happen, that even the smallest assumptions on the outlook of coal end up having a big impact on what their equity value is,” said Kristoffer Inton, a Chicago-based analyst for Morningstar Investment Services Inc.

A few factors behind the most recent stock swings:

  • They’re trying to restructure their debt: Servicing high debt loads from bad bets placed in 2011, when coal was much more expensive, has already forced miners including Walter Energy Inc. and Alpha Natural Resources Inc. into bankruptcy. Arch and Peabody are both grappling with heavy debt loads from their own acquisitions.

    After Bloomberg News reported on Aug. 18 that Arch is looking to compromise with lenders opposed to its proposed debt swap -- and thereby stave off the threat of bankruptcy -- shares shot up 533 percent in nine trading days. But Arch is having trouble completing the swap, with senior lenders still opposed. What’s more, bond traders don’t think the deal would be enough to fend off a bankruptcy, said Spencer Cutter, an analyst at Bloomberg Intelligence. This chart of Arch’s stock and bonds shows the conflicting views of the company’s chances.
  • Short sellers have been piling in and out of positions: The bounce in stocks U.S. coal saw last week suggests that short sellers were fleeing their positions, creating a sell-off that pushed up prices, Anthony Young, a Florida-based analyst for Macquarie Securities Group, said by phone. Peabody had averaged about 15 million trades a day for a month before Thursday, when it totaled almost 60 million. “That’s a pretty classic example of a lot of people trying to get out of a position very quickly,” he said.

  • Coal fundamentals are still awful: The kind of rebound investors are looking for would take a rally in actual coal prices. And that’s still nowhere to be seen. Spot prices for metallurgical coal, used in steelmaking, continue to fall to new multiyear lows, and the thermal coal used by power plants is facing increasing competition from cheap natural gas. The result is that U.S. coal production was down 8.6 percent this year through Aug. 22, according to the Energy Information Administration.
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