Mining Accident Could Take Heavy Financial Toll on Massey Energy

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.

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CAROL

Being raised "A COAL MINERS DAUGHTER, GRANDAUGHTER AND SISTER",I am too familiar to the dangers lurking within the deep holes of mines. My maternal grandfather was killed in 1959 when a roof caved in. Later my father spent 30years underground working general labor to mining supertendiant, all 3 of my brothers miners too, with my youngest at the age of 35 years being physically maned,totally disabled, and had only 1% chance of living--What is my opinion of the safety rules and regulations for the eastern coalfields, please allow me to share: . Continue more spontaneous Mine Inspector follow-up. Check today, and return with a surprise visit totally unannounced. Surpise visits with an inspector who has no reason to be bias. Let the mininglogs be paperless (GO GREEN). A mines records should be computerized,dated, with no allowance of being able to FIX-IT after the fact. NOT Charted, not done, period! The shift boss notes should be noted each shift, again computerized,then when a disaster happens, the problems can be followed with documentation. . For federal mine inspectors-should they be allowed to return over and again to check one mines where they have become known as first name acquaintances of mining company officials? NO! . An excuse I heard so often," there is not enough federal or state mining inspect ors" to do the above. Could this be an actual area for which the taxes and sur- charges each mining company pays quarterly be used- TRAIN,HIRE,AND HOLD FEDERAL AND STATE INSPECTORS TO SCRUENITY. . Rotate these inspectors to different regions. These rotations mandated tokeep the politics away from the"BIG" enterprises, who can pay there way out! . Accidents happens daily in the coalfield. Yes inspectors do visit, yes mining companies are fined. However in my opinion the cost of a fine does not equal the cost of loosing ONE, father, grandfather, husand, brother, or sister! . Finally I have so often heard the excuse, "miners gets great pay" for the jobs they do,and with very little education. Maybe our "BIG COAL EXECU- TIVES" whom worked years ago in mining should bring out their minerswear,boots, lights and Minor Lunchbuckets, and go down, get dirty, and yes BREATHE the awesome "AIR". Of course if they actually were former miners, and aren't just paper pushers- this could work. . Why is safety such an issue with me-well I have not only experienced it first handed, I have transported the miners to the hospitals, I later was a RED ALERT ER Staff member, later a dedicated hospital director, yet not once was it ever easy to tell that mother,father,wife, child,brother or sister there loved one would not be home FOREVER! . This is the United States, we should at least hold every business account- able for the safety of their workers. Workers Compensation is wonderful,but compensation doesn't take the place of that Coal Miners Love-Safety help bring him home! . I challenge the President,Senators,Congressmen,Governors,and ALL Safety Law makers to go the extra step to improve the work conditions. Please consider that big coal money will always be an almighty bandaide. We can rise above this with the right leadership and Special-OP teams to ensure that more employees regardless to industry and Hazmat will be able to live long pro- ductive lives. Thank You for this "Brain-Storming" session!

November 05 2010 at 7:32 AM Report abuse rate up rate down Reply