The Money Map Advantage
Wednesday, August 10, 2005
By Horacio Marquez
#4
** Westmoreland Coal: Too Little, Too Late
Westmoreland (NYSE: WLB) reported DISSAPOINTING results after the market close yesterday. SELL IT AT THE OPEN and take the 6% plus profits we have on the stock. This quarter is a step back in profits, which comes before many great leaps forward if the company executes its vision appropriately.
When it rains, it pours, and Westmoreland suffered rain and other problems that plagued their results this quarter:
The $3.9 million loss that Westmoreland reported for the quarter should be adjusted by the one-time settlement cost and legal fees of $1.5 million, therefore resulting in a loss from continuing operations of $2.4 million. To compare it to the second quarter of 2004, we must take the profit of $4.4 million for that quarter and adjust it downward by the one-time contract arbitration of $11.2 million in that quarter: the adjusted figure is a $6.8 million loss.
While the comparison is favorable, the problems at the Jewett mine with continuing losses due to long-term fixed-price contracts that do not allow for reimbursements of increased fuel and steel prices remain an important recurrent issue . This mine, one of their five, accounts for about 22% of their coal production.
The long-term contracts did not allow them to capture the marked spot coal price increases. At the same time they got especially squeezed by increasing costs of steel and fuel in their Jewett mine, which at their current contract prices is uneconomical.
Westmoreland continues to try to renegotiate with Texas Genco the price contract that was signed at a fixed price until 2007. Not employing derivatives in managing these commodities risks was another shortcoming.
Also, Westmoreland suffered from its ROVA electricity-generating plant outages and from not being able to complete the purchase of the 50% of the project they do not own, because of pending litigation.
ON THE POSITIVE SIDE:
About 18% of the coal sales volume is scheduled to be renewed or renegotiated during the next six months based on the Powder River Basin market prices. These prices have almost doubled in the last six months. This could conservatively mean some $7 million a quarter or more that would go almost directly to the bottom line.
The coal market conditions were outstanding in this quarter , as prices continue to fly up. Companies like Peabody Energy (NYSE: BTU) more than doubled earnings. Peabody achieved this despite suffering from rain-caused problems (derailments in the PBR – Powder River Basin of Wyoming and Montana), like the ones that affected rivals Arch Coal Inc. (NYSE: ACI) and Massey Energy Co. (NYSE: MEE), and to a lesser extent Westmoreland .
What is more, Westmoreland sold 9% more tonnage than in the comparable quarter of 2004. Coal revenues were up 21% excluding revenue from arbitration awards in 2004 and experienced no lost-time accidents year-to-date.
Average Weekly Coal Spot Prices
Week Ended July 29, 2005
Almost all the coal is sold to power generating plants, which enjoy a fairly stable volume growth. All of Westmoreland’s mines are the lowest cost-suppliers to each of their respective principal customers.
Nearly all of the power plants that Westmoreland supplies were specifically designed to use the company’s coal and are very close to the mine that supplies them. The plants supplied are among the lower cost producers of electric power in their respective regions and are among the cleaner producers of power from fossil fuels. All of the power-generating plants supplied are base loaded, which means that they enjoy relatively consistent demand.
Westmoreland is still a company with superlative potential, if it can accelerate the resolution of the significant issues it faces. While producing one seventh of the volume of Peabody, therefore not enjoying the same types of economies of scale, and having 26% greater indebtedness ratio, Westmoreland is about breakeven, while its potential profits, if we apply Peabody’s profitability metrics to Westmoreland, could easily be about $16 million a year. This would justify a much higher valuation.
TAKE PROFITS NOW, looking for a catalyst and a better entry point later. We will continue to monitor developments in WLB , looking to the Jewett Mine price renegotiation, the acquisition of the remaining 50% in the ROVA project, renewal at higher prices of 18% of the volume, new projects and the positive windfalls from the energy bill, especially the Native American coal resources that the company already operates. Petroleo Brasileiro (NYSE: PBR), in the meantime, keeps flying.
Enjoy and profit,
Horacio Marquez
If you have any questions, feel free to call one of our VIP Trading Services representatives at 888.570.9830 (toll-free) or e-mail: viptrader@oxfordclub.com , or Mt. Vernon Publishing at 888.384.8339 or 410.230.1200.
Stock
Current Price
Comments
Westmoreland Coal (AMEX: WLB)
Take profits!
Sell. Close out position.
Petroleo Brasileiro (NYSE: PBR)
$58.99
Buy. Sell stop is $42.23.
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