Friday, April 11, 2014

Westmoreland Coal Makes its Own Sunshine

Last week a list of companies setting new 52-week high prices included an expected achiever  -  Westmoreland Coal Company (WLB:  Nasdaq) .  The stock has been on a tear since the end of last year and gathered momentum as the new year rolled around.  The coal industry has been under a cloud in recent years.  However, Westmoreland created its own sunshine by acquiring the Prairie and Mountain coal mining operations of Sherritt International.  The deal will double Westmoreland revenue and provide the company with new consumer product lines in activated carbon and char.

Investors appeared to fall all over Westmoreland after the deal announcement, taking into stride a hefty new debt issuance.  The company raised $425 million in new debt with a 10.75% coupon.  The proceeds will support closing the Sherritt deal sometime in the second quarter 2014.

Coal seems to have accumulated quite a bit of bad fortune in recent years.  Electricity consumption is on the decline.  Utilities are increasingly turning to renewable sources or cheap supplies of natural gas for electricity production.  Indeed, utilities are more often than not closing coal-fired power plants as they attempt to comply with stricter regulations on emissions of mercury and acid gases.

The stocks of coal companies such as Alpha Natural Resources (ANR:  NYSE) and Walter Energy (WLT:  NYSE) and more reflective of coal industry trends.  Westmoreland appears to have avoided their fate by taking on the mantle of consolidator.  So despite the same red ink as any of the other coal producers, Westmoreland is being given a hero’s treatment.

WLB now looks overbought.  I think it might be wise to take some profits as a review of recent trading patterns suggest the stock is now poised for a retreat to lower levels.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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