DB positive on coal on strong fundamentals and emerging structural changes
DB is positive on coal noting improvement in global economies, coal plant additions, ongoing electrification trends, infrastructure bottlenecks, and increasing import levels from China (a net importer as of 2009) and India. Our Commodities team calls for steam coal to average $85/tonne in 2010 and $100/tonne in 2011 and for met coal to average $175/tonne in 2010 (though recent quarterly prices settlements point to $200/tonne) and $190/tonne in 2011 - though there is a possibility that met coal prices could rise again next year.

Met coal exposure and Excess Cash yields underlying key themes
Spot prices for met coal continue to trend above expectations, providing room for potential earnings upside should prices settle beyond market expectations. Met coal producers - Alpha Natural and Peabody have outperformed. However, we believe that Alpha Natural's share price has more upside potential as its multiple re-rates on new size and scale post transaction - leading us to prefer it over Peabody. Looking at Excess Cash yields of the NA Coals, we note that Alpha Natural and Arch Coal's share price suggest higher upsides should the markets recognize this intricacy.

DB estimates ahead of consensus, PT on forward EV/EBITDA multiples
Average forward EV/EBITDA multiples over past years denote a degree of consistency within each NA Coal producers, despite the rather volatile nature of share prices in the sector. Peabody and Arch Coal have re-rated over the years as the companies grew in size and scale, and more recently Alpha Natural has started to re-rate. We apply a 7x EV/EBITDA multiple to the two leading NA coal producers, Peabody and Arch Coal, fairly in line with their historical average; and a 6x EV/EBITDA to the new emerging leading producer (post its merger with Foundation Coal) Alpha Natural as it re-rates on increased size and scale. We value Alliance Resource using a dividend discount model, which implies a 5x multiple. We note that our 2011 EBITDA estimates are 8% ahead of consensus.

Risks include coal/natural gas prices, China, economy, USD and freight rates
Earnings for NA Coals are highly levered to the average realized coal prices (~9:1 sensitivity), inflationary cost pressures and strong USD. Other risks include pullback in global economy, direction of energy prices and changes in regulation. Other risks include execution on existing and growth projects, funding, permitting, environmental requirements, staffing, and equipment availability. Risks discussed within the Executive Summary Valuation and the Investment Thesis section for each company.

Eoin Treacy's view Coal futures have yet to break upwards from their base but have sustained a progression of higher reaction lows over the last year and held above the 200-day moving average which is beginning to turn upwards. A sustained move above $60 would indicate that demand is becoming more dominant. (Also see Comment of the Day on January 25th and February 22nd).


The ratio of natural gas to coal is testing the upper side of the 18-month range near 14. This area is also in proximity to the 9-year high and further illustrates the underperformance of natural gas to other energy assets. The advent of shale gas is changing the USA's energy landscape, providing abundant supply and reduced prices. The relative attractiveness of coal and oil as fuel sources for new production facilities is therefore impacted, particularly because it is unlikely that the relative underperformance of gas is going to change any time soon. Nevertheless, as global economic activity continues to expand, demand for coal both for energy, heating and industry is likely to resume its growth.

The Powershares Global Coal ETF and the Market Vectors Coal ETF both found support in the region of their 200-day moving averages in February and are rallying towards their recovery highs. A sustained move below their MAs would be required to limit potential for continued higher to lateral ranging.

Chinese coal companies remain some of the better global performers with Yanzhou Coal finding support in the region of the MA and the 2008 high. It is now retesting the HK$20 level and a sustained move below HK$15 would be required for this area to offer anything other than temporary resistance. Inner Mongolia Yitai Coal is testing the upper side of the four-month range and a downward dynamic would be needed to check scope for an upward break. Shenhua Energy continues to consolidate in the region of the MA.

In the USA, Patriot Coal has sustained a progression of higher lows for more than year. It retested the January high earlier this month and continues to consolidate near $20. A downward dynamic would be needed to check potential for an upward break. Alpha Natural Resources has a similar pattern. Arch Coal continues to form a first step above its base between $20 and $30. It needs to sustain a move above $26 to indicate that demand is regaining the upper hand.

South Africa's Exxaro continues to extend the upward break and while it is somewhat overextended in the short-term a sustained move below ZAR11,000 would be required to question the consistency of the medium-term uptrend.

In Australia, Centennial Coal continues to plot a step-sequence uptrend and a sustained move below AU$3.50 would be required to question scope for further upside. Whitehaven Coal continues to consolidate above the 2008 high and has unwound most of the overbought condition relative to the 200-day moving average. A sustained move below AU$4.25 would be required to limit potential for a successful upside break.