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Earnings Preview – CEIX

Leave a Comment / CEIX, Earnings, MetCoal, Thermal Coal, Updates / By Matthew Warder

Production Slowed in Q2, but Thermal Prices Stronger than Expected

I’ve mentioned in the last fewpieces that while Peabody and Alpha are absolute beasts to puttogether, HCC is by comparison pretty easy, as it’s just two mines. Wellthankfully today’s rundown of tomorrow’s CEIX earnings expectations falls intothe latter category (just four mines), although it does have some nuances thatneed to be accounted for.

First off, let me just point outthat I had pretty low expectations for thermal coal markets coming into theyear. Domestic and global gas markets were oversupplied, inventories were high,demand wasn’t great…let’s just say there were a lot of issues. But the ongoingAI datacenter buildout narrative has really breathed some life back into futurepower demand prospects. And the market has actually proven to be tight enoughthat any buying pressure has resulted in decent prices.

And that price range actuallybodes pretty well for CEIX, as they are one of, if not THE lowest cost thermalcoal providers into Europe. So with that in mind, let’s dive in and see howclose we can get…

The biggest issue for thecompany was the collapse of the Francis Scott Key Bridge in Baltimore, whichleft the company without significant access to its largest market from lateMarch until mid-May. To account for this, I cut export assumptions in half, andassumed the remaining production was sent to domestic customers.

The company operates four totalmines. Three of these are big longwall thermal coal operations – Bailey, EnlowFork, and Harvey – which comprise the company’s Pennsylvania Mining Complex,and Itmann, which is a small low-volatile metallurgical coal operation insouthern West Virginia. Production for those mines is listed in the tablebelow, along with their MSHA ID numbers.

Source: MSHA, Seawolf Research

The bridge outage in Baltimorecaused production to decline over 20% in Q2 from 6.5 to 5.2 million short tons,so clearly top line numbers are going to take a hit. On the other hand,seaborne thermal coal prices actually went UP during shoulder season. And theforward curve is now positioned even higher, which means that CEIX may be ableto make up some of that lost revenue going forward. My price assumptions foreach mine/delivery point are listed below.

Source: Seawolf Research

CEIX reported an average per toncoal revenue of $68.33/st in Q1, so we’re in the ballpark here. Domesticthermal coal prices were lower in Q2 and so have been reflected here.

Like HCC, costs for CEIX arealso pretty straightforward as they only have four mines, so I’ll just post mymine-level calculations here.

Source: Seawolf Research

CEIX reported Q1 cash costs of$40.29 so no need to adjust here, we can just move on to results.

The one thing I should point outhere to anyone looking through these results for the first time is that CONSOLalso reports cost and revenue from freight, as they export coal for others aspart of that business.

That ~$70M of costs areoffsetting, but we need to add them in to the coal revenue results to comparetop line numbers. When I do that to the results below, I get $540.2M inrevenue, which is pretty close to the $565M reported.

Source: Seawolf Research

Costs are also in line and netincome is only off by $20M, which is due to “Miscellaneous other income” and“Gain on Sale of Assets” noted two screenshots above. And when I add that in torevenue, earnings per share come in spot on with the company’s Q1 reportednumber at $3.39/sh.

That also likely means our Q2Revenue and net income estimates of ~$420M (including a ~$70M proxy forfreight) and $27M or $0.94/share are reasonable. And unsurprisingly, each fallright in line with current estimates.

So while likely not a greatquart

er, it wasn’t really a bad one either. But just a quick peek forward atthe next two quarters – with all of these assumptions pulled forward atthe current curve prices of ~$125 for API2 Coal show that both revenue and earnings are set to accelerate big time.

Source: Seawolf Research and Company Filings

That’s a whole lot of money tojuice their buyback, even if thermal coal corrects in the shoulder season.

Given the recent selloff due to broader marketpressures, this has become a name to think about accumulating for a potentialprice run in winter…assuming we have one this year!