Investors drilled Massey Energy (MEE) for a second day in a row, sending its shares down more than 6% in the wake of a West Virginia mine explosion that killed 25 miners, with four more still missing. But stock price losses are likely just the beginning of the company's fiscal pain: Further financial consequences from lost production, fines and lawsuits are likely.
Shares of Massey Energy were down 6.17% in mid-afternoon trading on Wednesday, falling from $48.45 to $45.46.
Wall Street's disfavor is coming down on a company with a history of safety violations, including citations for not properly ventilating highly combustible methane gas at the Performance Coal subsidiary which operates the Big Branch mine, where the explosion occurred. While the cause of Monday's blast has not been confirmed, methane had to be vented from mine before rescue crews could continue searching for the four missing miners today.
Analysts expect public and government scrutiny on Massey to intensify as the investigation into the worst mining accident since 1984 unfolds. In the meantime, the financial damage the mining company will take from this tragedy is beginning to come into focus.
Fines, Lawsuits and New Regulations
Morningstar equity analyst Michael Tian notes that, depending on the level of damage caused by the explosion, Massey will have to spend millions either to rehabilitate or seal the Big Branch mine. Lost production from the mine will drag down projected earnings for the Massey. Since company filings revealed that Massey does not carry business interruption insurance, any financial losses due to production stoppages will be translate directly onto the company's bottom line. If Massey is found at fault, the company is also likely to be hit with millions of dollars in fines, and lawsuits connected to the explosion could potentially cost it hundreds of millions more.
"In the past, tragic accidents like this have brought the scrutiny of the federal government, which mandated more safety equipment, training, and mine modifications," said Tian. "These regulations did much to raise the cost of mining in Appalachia over the past few years, and history could repeat itself."
If new safety regulations increase the cost of mining coal, Massey's profitability will undoubtedly be affected, as would that of other companies in the industry.
While Jefferies & Co. analyst Michael Dudas expects scrutiny of Massey and the coal mining industry to intensify, he maintained a buy rating on the stock with a price target of $62.
"We believe Massey Energy is a well capitalized Eastern coal producer and ranks as the largest, most diversified, and lowest cost coal producer in Central Appalachia," Dudas said on Tuesday.
Whether others on Wall Street concur with Dudas' assessment remains to be seen. ABC news reports that concerns about Massey Energy's environmental issues have moved Bank of America to end its relationship with the company: The bank will no longer provide it with funding for its mining operations. JPMorgan Chase stopped providing financing for Massey Energy in 2008. Massey Energy has a reported $1 billion in debt, and like most large companies, needs financing to continue operating.
The financial impact of the accident on the company's reputation won't be fully known for many months. Other businesses may not want to partner with a company suffering from a damaged reputation, and investors may not want to invest in a company that has a long history of deadly accidents and lawsuits that can severely impact its stock price.
Basics of Diversification
Learn one of the fundamental concepts of building a portfolio.View Course »