Massey Energy Company (NYSE: MEE) is America's 4th largest coal producer by revenue. Operating in the Central Appalachia region, which includes West Virginia, Virginia, and Kentucky, Massey Energy mines, processes, and sells low-sulfur, high-quality coal for a variety of industrial uses, including electricity generation and steel making.
Massey owns 2.3 billion tons of coal reserves and has 68 million raw coal tons of annual processing capacity, making it the largest coal producer in Central Appalachia by a wide margin. As an energy provider, and specifically a provider of nonrenewable energy, Massey is very sensitive to the world's demand for energy, and the growing global trend toward cleaner energy sources.
In January 2011 it was acquired by a Alpha Natural Resources (ANR) for $7.1 billion. When the combination is complete (late 2011) the new company will have 110 active mines, rank first in metallurgical coal production, first in coal reserves (5.1 billion tons). Synergies of operations will save the company about $150 million a year.
Massey Energy produces, processes, and sells bituminous coal of various steam and metallurgical grades, primarily of low sulfur content, through 23 processing and shipping centers. At January 31, 2010, the Company operated 56 mines, including 42 underground mines (two of which employ both room and pillar and longwall mining) and 14 surface mines (with 12 highwall miners in operation) in West Virginia, Kentucky and Virginia. The Company produces coal using four mining methods: underground room and pillar, underground longwall, surface and highwall mining. In April 2010, the Company completed its acquisition of Cumberland Resources Corporation.
Massey sells two main types of coal: steam coal, which is used by utility companies to generate electricity; and metallurgical coal, which is used to produce coke, a key component in steel production. MEE sells the highest-valued steam coal in the United States, and Massey's metallurgical coal is exported around the world due to its high quality and environmental friendliness (low sulfur content).
Second Quarter 2010 Results (ended June 30, 2010)
For the second quarter of 2010, Massey Energy reported a net loss of $88.7 million or $0.88 per share. Massey generated $693.1 million of produced coal revenue in the quarter from the sale of 9.8 million tons of coal. By comparison, Massey reported net income of $20.2 million on produced coal revenue of $603.2 million in the second quarter of 2009 from the sale of 9.4 million tons of coal.
Massey Energy's Upper Big Branch coal mine had been cited hundreds of times for safety violations before it exploded in April 2010, killing 29 workers. Massey Energy blamed the deadly explosion on a natural event that could not be prevented. Mine safety experts and federal mine safety officials are dismissing that theory as ‘self-serving and unlikely.’ Massey Energy is basing the theory on elevated methane gas readings inside the Upper Big Branch mine well after the April 5th blast. There were methane readings inside the mine 2.5 times above normal. It has been theorized that the rush of methane came from a large crack in the mine floor.
The Upper Big Branch disaster has tainted Massey's safety record and could subject the company to government oversight and further safety regulations.
In many situations, coal is a viable substitute for oil as a source of energy. Oil prices have been rising in recent years, as the supply from oil-producing regions such as the Middle East has been restricted. Even with the frenzy of oil exploration and production in the U.S. recently, Central Appalachia's coal reserves still represent the energy content equivalent of all proved oil reserves in the United States. Massey controls 1/3 of the reserves in Central Appalachia, and stands to profit from the rising oil prices, which will push up demand for coal.
As the largest producer in the Central Appalachia region, with 2.2 billion tons in reserves, Massey may be the only firm in the region with the reserves to continue operations for the next decade without needing to move into higher-cost reserves or pursuing acquisitions. The growing scarcity of new reserves benefits companies such as MEE that have the potential to continue supplying in the future.
As the threat of global climate change looms, nations and private companies have sought ways to minimize greenhouse gas emissions. One solution has been to use coal that emits less sulfur, an environmental hazard, into the environment. The so-called Clean Coal Movement has spearheaded a trend towards increased demand for high-quality, low-sulfur coal, such as that produced by Massey, for both industrial and metallurgical uses.
With the rise of rapidly-developing economies such as those of India and China, the global demand for energy has been rising rapidly. Rising global demand for energy positively affects Massey, as demand growth has outstripped increases in supply, leading to shortages of energy sources and higher profit margins for energy companies. China and other areas of Asia have significantly increased their demand for coal specifically, demanding more coal than other sources of energy because coal is generally lower in cost, although it can be less clean. Furthermore, as oil supply diminishes, more companies around the world will turn to coal for their energy needs, which will give Massey a larger potential market.
The global eco-friendly trend has spawned legislation in many countries in favor of renewable energy. For example, the U.S. enacted the Energy Policy Act of 1992, which introduced the Production Tax Credit (PTC) to independent power producers. This hurts nonrenewable energy companies such as Massey, which must compete with the government-subsidized renewable energy forms. However, Massey's low costs of production, relative to its coal-producing competitors, means that Massey will suffer less than competitors, and the regulations may end up helping Massey by eliminating its competing coal producers.
MEE also competes with a wide variety of coal producers located outside of the U.S., notably companies in Australia, Canada, Columbia, Russia and Venezuela.
Massey is the largest producer in Central Appalachia by a wide margin, producing about 35% of the region’s production and approximately twice as much as the nearest competitor.