Arch Coal (ACI) +11.87%
Since April 28, Arch Coal has risen more than 38 percent in response to increased regulation and permitting constraints on surface mines in Appalachia.
To briefly summarize, the U.S. Environmental Protection Agency (EPA) began an aggressive review of permit requests for mountaintop coal mining, citing serious concerns about potential harm to water quality. Separately, the Department of Interior (DOI) is seeking to overturn a Bush administration regulation allowing mining companies to dump their waste near rivers and streams and return to the standard set in 1983.
Mountaintop removal is the process where companies clear-cut a mountaintop and then blast an average of 800 feet off the top of the mountain to access coal seams that lie beneath. Rubble from the blasted mountains, often containing toxic debris, is then dumped into adjacent valleys. This results in the blocking of natural streams, often causing floods and frequently mixing waters with toxic waste. Thus, many water resources in such areas become contaminated.
According to Credit Suisse, affected surface mines in Central Appalachia account for approximately 9 percent of total U.S. coal production. While it is unclear how much production will actually be impacted, there is still potential for a significant backlog of permit applications in the coming months until more clarity regarding the re-interpretation of both the Clean Water Act and the Surface Mining Control and Reclamation Act (SMCRA).
This serves as a positive catalyst for U.S. coal producers since the U.S. coal market has been widely expected to be oversupplied in 2009. In justifying expectations, many point to the 1999-2002 period when Judge Hayden wreaked similar havoc on Mountaintop mining permits. The end result was higher U.S. coal prices as permit backlogs translated into production shortfalls and ultimately a supply shortage.
Coal producers with heavy-exposure to the Appalachian mines will likely suffer, but companies that produce the majority of their coal elsewhere are smiling. Arch Coal has no mining operations in the Appalachian Mountains and recently acquired additional mines in lucrative Powder River Basin.
Coal giant Peabody Energy (BTU) has insignificant exposure to Appalachia and will also benefit from less production in the area. Peabody is up 27.65 percent in the last four trading sessions.
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Peter Lazaroff, Junior Analyst
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