Macarthur Coal Is Melting In The Dark

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By Greg Peel

Macarthur Coal ((MCC)) has been hit by a “sudden and unprecedented” reduction in coal sales as customers have deferred shipments, management announced yesterday.

Sudden?

“For some time,” the Macquarie analysts noted this morning, “we have been sceptical of Macarthur Coal’s efforts to maintain FY09 production and earnings guidance amid global steel production cuts”. Indeed, most analysts had already assumed production cuts into their own earnings forecasts even if MCC was refusing to see the writing on the wall. How long could iron ore producers report deferred shipments before coking coal was next? Spot coal prices have collapsed – at least in what few deals have been transacted. Spot prices tend not to collapse because of increased demand.

As for “unprecedented”, well perhaps. So severe was the cut to sales guidance that even already bearish analysts were taken by surprise. MCC took its profit guidance in the first half of FY09 down from $150-160m to $75-125m. The reason why the range has blown out from $10m to $50m is not just because of increased uncertainty, its’ because MCC is now underwater on currency hedges against sales it’s not going to make. Management is yet to decide how best to account for the potential $48m in losses.

But market uncertainty is certainly key. Management acknowledged “considerable uncertainty” in ongoing demand and its not getting any argument out of the analysts just yet. The problem now for investors is that management’s reaction to this uncertainty, while prudent, has left them high and dry with no great hope for future growth.

Apart from slashing production and earnings guidance, management has suspended the interim dividend and deferred capital expenditure on developments and exploration. It has also cut jobs. MCC is not under threat of any debt covenants, but with a cash position of $49m and debt of $47m, as well as no undrawn credit facilities, it’s a tight situation. The company would run the risk of burning cash were it not to scale back operations.

So the company’s growth options are now on hold as MCC looks toward riding out the storm of uncertainty. Analysts have taken a knife to earnings forecasts and target prices. MCC entered yesterday with Buy ratings from UBS, ABN Amro and Deutsche Bank, Hold ratings from Aspect Huntley, GSJB Were and Merrill Lynch, and a Sell from Macquarie. UBS and ABN have today downgraded to Hold while Deutsche has gone straight to Sell and Merrills has dropped from Hold to Sell. That leaves a B/H/S ratio in the FNArena database of 0/4/3.

The average target has fallen from $8.23 to $3.42 in one fell swoop. Today’s trading price is around $2.65 anyway, but Deutsche is now the low-mark target at $1.99.

That’s one coal miner who won’t be leaving the cake out in the rain again. While analysts were in unison in shuffling MCC to the back of the pack of preferred coal exposures, there is no agreement on who should be at the front. Felix ((FLX)), Centennial ((CEY)) and New Hope ((NHC)) all rate a mention.

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