Goldman Sachs Comments on Coal (ANR) (ACI) (WLT) (SXC) (CLD) (BTU)

On Monday, James River Coal Company (Nasdaq: JRCC) filed for bankruptcy, prompting Goldman Sachs analyst Neil Mehta to examine liquidity for the group. In summary, Mehta said near-term liquidity was adequate but high leverage limits equity value for investors.

"While we believe liquidity is adequate in 2014/2015 given few near-term maturities, we believe high leverage levels significantly reduce equity values for met-levered stocks, including ANR (NYSE: ANR), ACI (NYSE: ACI) and WLT (NYSE: WLT)," said Mehta.

"In the last 12 months, stocks with stronger balance sheets (SXC (NYCE: SXC), CLD (NYSE: CLD), CNX (NYSE: CNX), BTU (NYSE: BTU) outperformed those with weaker balance sheets (ACI, WLT, ANR) by 54%. We continue to prefer stronger balance sheet names over companies with high leverage until greater confidence emerges in a cyclical recovery in met coal prices. Based on our estimates, Sell-rated ANR and ACI require a 2015 met price of $170-$180/MT to turn FCF positive, while Buy-rated BTU should generate positive cash flow at $150/MT," added Mehta.

Mehta ties the recent coal rally to expectations for US met production cuts, mean reversion, potential benefit of a China stimulus program on global steel production, and a modest increase in the AUD/USD exchange rate.

"While we expect the met benchmark to improve from $120/MT in 2Q2014 to $152/MT in 2015 – US met coal stocks such as WLT, ANR and ACI trade near peak multiples, driving our more negative outlook," he added.

For an analyst ratings summary and ratings history on Peabody Energy click here. For more ratings news on Peabody Energy click here.

Shares of Peabody Energy closed at $17.73 yesterday.

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