The explosion that killed 25 workers at a Massey Energy coal mine in West Virginia may harm the company's public image, but will have few lasting effects on its financial performance.
Massey's stock fell 10 percent in afternoon trading on the New York Stock Exchange Tuesday, a day after the explosion at the Upper Big Branch Mine in Montcoal, West Virginia. The blast killed 25 miners, left four missing and injured two.
Though Massey's reputation could suffer because of the explosion, Wall Street remains impressed with its long-term ability to ramp up production to reap higher prices for steel-making coal.
"The company's performance will be hit and they will lose some production, but they are realizing high met (metallurgical coal) prices and there will be more upward pressure on prices," said Jim Thompson, editor of Coal & Energy Price Report, an industry newsletter.
Jefferies & Co maintained a "buy" rating on Massey shares.
"With a favorable product mix, well capitalized infrastructure and solid margin generation in a very difficult market, we believe the shares appear under-priced," Jefferies analysts wrote in a research note.
The Upper Big Branch mine produced 1.2 million tons of high volatility metallurgical coal in 2009 — just over 3 percent of Massey's 38 million-ton production total. But Massey said in February it was ramping up production of metallurgical coal to tap in to growing demand from global steelmakers, and the West Virginia mine had increased production recently.
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Mine blast in West Va.
"In pure volume, it's not a particularly significant event for them," said Thompson. "But it comes at a time when met coal is screaming hot and that mine produces good quality met coal.
"In terms of production, they will take more of a hit on quality than quantity. This was a horrible tragedy and it's very ill-timed for met coal buyers as the market is very intense," he added. "In the long term, it will not substantially change how much coal Massey produces."
Reputation may be hurt
Less certain is the effect that the explosion will have on Massey's public image.
"We believe this tragic event presents some unquantifiable risks to Massey's reputation as a safe operator," Stifel Nicolaus analyst Paul Forward wrote in a note to investors.
Mining has always been a dangerous job, though 2009 was the safest year ever for U.S. miners, with 34 deaths, according to federal data. That is 18 fewer than 2008.
The 18 deaths reported for coal mines last year were the fewest in U.S. history. There were 16 deaths in mineral mines, also the lowest annual number ever, the Department of Labor's Mine Safety and Health Administration (MSHA) said.
Massey said in February that 2009 was its best-ever year for safety. It said no workers died on the job that year.
Two years ago, Massey's Aracoma Coal Co paid an undisclosed sum to settle a wrongful death case brought by the widows of two miners killed at another West Virginia mine.
"Massey is no stranger to law suits," said Jeremy Sussman, an analyst at Brean Murray Carret & Co, when asked about whether the Upper Big Branch blast would produce legal action. "In terms of liability, I don't see it being as big as in the past when they had contract and environmental disputes."
According to federal records, the Upper Big Branch Mine has had three fatalities since 1998 and has a worse than average injury rate over the last 10 years. Two miners died in roof collapses in 1998 and 2001, and a third was electrocuted in 2003 when repairing an underground car.
A spokesman for the company was not immediately available for comment.
Massey could suffer financially in the short term, Sussman said.
Following the last two major U.S. mine disasters — Sago, West Virginia in 2006 and Crandall Canyon, Utah in 2007 — those mines were closed.
"The fact the last two are off-line now does not bode well for the long-term future of this mine," he said. "If this mine were to be down for a considerable amount of time, it would clearly have a meaningful impact on EBITDA (earnings before interest, taxes, depreciation and amortization)."
The explosion could result in stricter safety measures. Miners already were subject to tougher U.S. regulations after the Sago explosion, which killed 12 miners.
The Upper Big Branch explosion could prompt federal inspections and higher fines for safety violations, he said.
"Costs per ton are up 50 percent because of safety requirements," Sussman said. Still, he added, the fines in effect today "don't have much of an impact on the bottom line of $10 billion companies."