Photo: cypheroz via flickr
Last week, Patriot Coal filed for chapter 11 bankruptcy protection.”The coal industry is undergoing a major transformation and Patriot’s existing capital structure prevents it from making the necessary adjustments to achieve long-term success,” said Patriot Coal CEO Irl Engelhardt.
This left investors wondering about the rest of the industry.
BMO Capital analyst Meredith Bandy tackled this issue in a new research note titled U.S. Thermal Coal: Appalachia Struggles, But It’s Not Lights Out For All.
“Arguably, the Patriot bankruptcy is likely to raise capital costs and sensitize investors to financial risks,” wrote Bandy. “This report seeks to take a deeper look at the financial health of the U.S. coal industry.”
One metric Bandy looked at was the Altman Z-score, the statistic created by legendary bankruptcy expert Edward Altman.
The Altman Z-score looks at various leverage metrics including debt to EBITDA and interest coverage.
“Only Arch [Coal] has an Altman’s Z-scores below 1.1, indicating a high likelihood of distress in the next two years,” wrote Bandy. “If Altman’s Double Prime Z is used to account for the capital intensity of the mining business, all companies are above the distressed category of Z<1.1.”
So, it’s no surprise that Bandy has an underperform rating and a $4 price target on Arch, which closed at $5.90 per share today.
Here’s a chart breaking down the coal industry’s Z-scores:
Photo: BMO Capital Markets