Thursday, November 15, 2007

Initiating Massey Energy (MEE) on Continued 'Shortage' Theme

Following up on the identical strategy for the buy in Agco (AG), I am starting a new position in Massey Energy (MEE), which will be the 4th coal stock in the portfolio. I know, coal the other white meat ... zzzz....

But when I went through the charts of my watch lists yesterday, this name was among the best. Today, as with Agco its down about 4% and has pulled back to only its 20 day moving average. So I began a similar size position to Agco here, 300 shares bought in the upper $28s, creating a 0.8% position. I have a larger buy down at $27.00 which would be near the 50 day moving average so I am hoping for a fall to that level. Obviously this is a startr position and I don't want to over do any new long exposure as this market looks quite sickly. So much for that financial revival.

Anyhow for earlier posts about the thesis on coal you can go here, if you are new to the blog. Massey is different than my other coal stocks in that its focused on metallurgical coal (that which goes into steel) - I was a bit hesitant to go in that direction because of potential global slowdown but in this world of shortages, it appears China's build out of entirely new cities is going to strain all sorts of energy sources, whether their GDP drop to 10% or 7% or 3%... once those cities are built, and people move in, energy needs go up. And urbanization begets urbanization. Thus steel. So with falling dollar, and this turning into a global market, coal is looking more like a typical commodity - much like metals or agricultural products. And US exports are now cheap and destined to stay that way for the foreseeable future. The chart strength tells me more than any fundamentals.

A recent story specific to Massey Energy here:
  • Coal producer Massey Energy Co (MEE) said on Friday it was spending $480 million to expand its Central Appalachian mines so it can export more and take advantage of increasing demand from the global steel industry.
  • The two-year plan to produce about 8 million more tons of coal would also position Massey as the dominant low-cost producer in the declining coalfields of Virginia, Kentucky and West Virginia, Chairman and Chief Executive Don Blankenship said.
  • Right now, he said, U.S. coal producers could benefit from a "perfect storm" to export more because of a weak U.S. dollar, high shipping rates and Asia taking much of the available coal from Australia, the world's largest exporter.
  • Steel-making, which needs metallurgical, or coking coal, was growing, especially in China and emerging economies. "Supply issues and the weaker dollar are making U.S. met very attractive," he said on a conference call. "That's why we are increasing our production over the next two years by 8 million tons." Massey produces about 40 million tons per year.
  • Massey projected 2008 coal shipments topping 2007 levels, with higher prices and forecast shipments increasing in both 2009 and 2010. New metallurgical coal business is expected to close at prices more than $10 per ton higher than a year ago.
  • On Friday's call, Blankenship said that in contrast to previous bullish coal markets, "the big difference now is the weakness of the dollar. "Also vessel freight rates are high and there is a shortage of vessels and (high) diesel prices."
  • "Given the costs, it does not make sense for Australian coal to be so prevalent on the Atlantic market. So we believe a large portion of our coal will be exported," he said.
  • Because it was expanding existing mines and using new equipment, Massey would be able to keep down costs. "The rest of the industry couldn't add 8 million tons collectively," he said.
So it is interesting how this all ties together - worldwide demand going up, dry bulk shippers rates skyrocketing, causing exporters to ship closer to home so that they don't get killed on the shipping rates any further than they already are (remember it now costs more to ship iron from Brazil to China, than the actual iron costs), which in turns leaves vacuums in the market, which are now being filled by exports from weak currency countries like... (sigh) the USA.

Now these coal stocks won't jump or fall 25% in a day like the dry bulk shippers, but they should be a more sustainable secular play (past 2 years). The risk of course is when the globe eventually slows (which it will) the baby gets thrown out with the bathwater and investors flee any "global growth" story. But the reality will show itself soon enough and those companies in the right areas will rebound.mee

Long Massey Energy in fund; no personal position

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