Full Steam Ahead at Patriot Coal

• The Company: Patriot Coal, the third largest producer of coal in the eastern United States.
• The Filing: Form 10-Q filed with the SEC on August 12, 2008.
• The Finding: Despite concerns in energy corners that slowing global economic growth could diminish demand — and pricing — for commodities, Patriot Coal remains optimistic on the market for thermal coal for 2009 and beyond. Chief Executive Officer Richard M. Whiting said on the recent second-quarter 2008 earnings call with analysts that coal fundamentals remain strong, with consumption of steam coal for electricity up approximately 10 million tons compared to the first six months of 2007.

The Upshot: Spun off from Peabody Energy in October 2007, Patriot Coal is a leading producer of thermal coal in the eastern United States, with operations and coal reserves in Appalachia and the Illinois Basin. Central Appalachia accounts for 75 percent of total coal mining revenue. Spot prices for thermal coal in the region have increased more than 150 percent since the beginning of 2008, selling for $140 per short ton for the week ended August 29, according to the Energy Information Administration. Forward pricing trends remain favorable, too, as Central Appalachia has been experiencing reduced coal production due to permitting, equipment and labor constraints, and safety regulations. Management forecasts its production to be lower by 0.9 million tons year-to-date as compared to last year.

Management of Patriot Coal opines that significant unsigned production affords the coal miner an opportunity to benefit from strong coal prices. As of June 30, 17 percent and 50 percent of respective 2009 and 2010 total planned production of steam coal has yet to be contracted.

The Question: Are thermal coal prices at or near peak cyclical levels?