Whitesburg KY

Massey plans will focus on metallurgical coal, exports

Massey Energy Co. is making a big bet on metallurgical coal.

Massey plans to up production of so-called met coal sold to the steel industry by dipping into its 2 billion tons of Central Appalachian coal reserves and using cash from operations to open new mines, Chief Executive Don Blankenship said during the Lehman Brothers CEO Energy/ Power Conference in New York last week.

The aim is to retake some of the 40 million tons of met-coal market-share lost over the years to Australia amid rising demand for metallurgical coal, Blankenship said.

“The Australians are struggling,” he said. “We’re in a great position to benefit from this market.”

Massey is gambling the already premium price of met coal stays high. Met coal produced more than $72 a ton in revenue for Massey in the second quarter, compared with a bit over $45 a ton for coal sold to electric utilities.

Blankenship said prices should rise to the $80s in the short term and perhaps higher “unless something unforeseen happens.”

Several factors suggest met prices will remain high, Blankenship said. Among them are expected increases in world demand for steel, ongoing shipping bottlenecks that limit exports from coal-rich Australia, continued economic growth in China and India, and the weak U.S. dollar and high ocean freight rates favoring U.S. exports.

If metallurgical coal prices rise, Blankenship believes Massey is positioned to cash in. Massey hasn’t signed contracts setting prices on half of next year’s metallurgical coal production and 85 percent in 2009, which Blankenship said puts the company in a great position.

Currently, met coal accounts for about 20 percent of Massey’s 40 million tons of annual production, but almost one-third of its $2.24 billion in revenue.

Massey’s aim runs counter to large rivals such as St. Louisbased Arch Coal, which prefers longwall mining in Appalachia and surface mining in the West. Arch recently sold its Ben Creek Complex in southern West Virginia to Alpha Natural Resources after longwall operation played out. Alpha expects to continue the operation using less-productive room-and-pillar mining, which leaves large blocks of coal behind to support the mine roof.

Blankenship told investors the company’s five-year business plan calls for expanding from 16 percent of Central Appalachian production to 35 percent and increasing coal reserves from 36 percent to 45 percent without making significant acquisitions. Massey’s large reserve base allows the company to hold more coal as rivals chew through their reserves, he said.

The position is largely the opposite on the utility coal side. Massey has sold much of its utility coal production through 2009 to lock in prices. Despite lower production, utility stockpiles remain 24 percent higher than normal, Blankenship said. “It has not come down this year,” he said. “It’s important to manage the business with facts and figures and estimates as opposed to optimism.”

Based in Richmond, Va., Massey is the nation’s fourthlargest coal company by revenue. It operates 19 mining complexes in West Virginia, Virginia and Kentucky.

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