Analysts say Consol cut is necessary

Analysts say Consol cut is necessary in the face of weak demand, even if it crimps production

Associated Press

NEW YORK (AP) -- Consol Energy's decision to cut back coal mining operations as demand for coal remains weak is drawing support from two analysts who rate the stock as a "Buy."

Pennsylvania-based Consol said Tuesday it will scale back operations at a northern West Virginia coal mine because of low market demand. Such a move is risky because it can lower revenue and profits for coal companies by crimping their sales volumes.

But several of Consol's competitors have announced similar moves in recent months. Their goal is to keep their overhead costs low while weak demand suppresses the price they can get for every ton of coal they sell.

Last month, Patriot Coal Corp. said it will cut back coal production in West Virginia because of the weak demand. In November, Arch Coal said it would be scale back production at its Dugout Canyon mine in Utah, where it cut 114 jobs. Alpha Natural Resources Inc. also cut back.

Citi Investment Research & Analysis analyst Brian Yu said coal companies are facing declining demand from utility companies that use coal to generate power. About half of all electricity is generated by burning coal.

Utilities are burning less coal in part because natural gas prices are falling so fast as more companies tap natural gas wells and boost supplies. That prompts many utilities to switch over to gas and take advantage of the cost savings.

Sterne, Agee & Leach Equity Research analyst Michael Dudas said it doesn't make sense for companies like Consol to sell coal into such a weak market.

"We support management's decision to reserve certain thermal coals for better market conditions," Dudas wrote in a note to clients Tuesday.

Shares of Consol fell 59 cents, or 1.6 percent, to $35.71 in midday trading.Its shares are up 17 percent since sinking to a 52-week low of $30.56 in early October, but they are still 37 percent below their high for the year of $56.32 in mid-March.

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