Quest Minerals & Mining Corp. (OTCBB: QMNM) continues to hit the wire with news regarding positive developments at its Pond Creek, Ky coal mine.
The stock closed up more than 15% Tuesday at $.0134 on nearly 35,000,000 shares traded for one of its best days in quite some time. In my opinion, QMNM holds a deal of upside potential for a number of reasons. I’ll touch on a few of them in a moment, but first, let’s take a look at the two most recent developments at Quest’s initial mine.
Striving for Increased Production at Mine #1
On 8/1 management noted that the property had recently achieved full production status and subsequently increased daily output expectations.
Today (8/12), Quest announced the addition of a “JOY (64” Bed) 21SC shuttle car to its underground operations”. According to the release, the new piece of equipment holds up to 5 tons of coal and works side by side with Quest’s existing 4 ton shuttle car.
Now, let’s get back to some of the reasons that have me convinced that Quest is indeed a compelling and timely low-cost play on the booming coal industry.
QMNM: A Low-Cost, High Potential Coal Play
1. Quest is a coal producing company: Gwenco, QMNM’s wholly-owned subsidiary currently leases more than 700 acres of coal mines believed to hold approximately 12,999,000 tons of coal. Furthermore, Gwenco is already extracting enough coal to require the installation of a larger conveyor system that will facilitate the company’s production of between 1,000 - 1,300 raw tons of coal per shift or 2,000 - 2,600 per day at Pond Creek.
2. Quest plans to monetize a portfolio of coal properties, not just one mine: QMNM has publicly stated plans to bring a second mine - Cedar Grove, KY - online by the end of 2008. Cedar Grove is located in very close proximity to Pond Creek and is expected to produce roughly identical output upon achieving full production status. In addition, initial engineering reports indicate that the coal located in Quest’s second mine is of higher quality than that of Pond Creek.
3. Quest Represents a Low-Cost, High Potential Play on the Ongoing Coal Boom: As more established competitors including Arch Coal (NYSE: ACI) and Massey Energy (NYSE: MEE) continue to demand a premium from a stock price perspective, Quest represents a very compelling low cost opportunity to capitalize on the ongoing coal boom. Despite the obvious dangers of investing in companies currently in bankruptcy and trading in the penny range, the potential rewards are monumental.
4. QMNM Made a 4,000% Advance from 6/18 to 6/23: Quest recently advanced more than 4,000% in 3 days on total volume of 643,000,000 shares traded. QMNM closed at $.0016 on 6/18 and hit the high point of its recent run at $.075 on 6/23.
5. $8+ million contract in hand: Quest has a $8M contract in hand with Logan & Kanawha Co., LLC., and recently noted that it had verbally accepted a 10% higher strike price per ton on coal delivered through December of 2008
Quest Undervalued?
Since $.075, QMNM’s trading behavior has been erratic at best. Despite tremendously high average daily trading volume for a penny stock trading in the sub $.10 range coupled with a number of stellar corporate announcements, the stock is parked below two cents. In my opinion, if Quest stays on track with recently stated production and rehab goals and quarterly financial reports become available, the stock will begin to receive a more favorable valuation in comparison to its peers. Here’s a quick look at some of them.
Massey Energy Co. (NYSE: MEE)
The Central Appalachian-based coal provider recently reported a stellar second quarter aside from a $245.3 million pre-tax charge related to ongoing litigation with Wheeling-Pittsburgh Steel Company.
Some of the highlights include: Record coal revenues of $710.3 for a 38% year-over-year gain; EBITDA increased 65 percent to $199.0 million excluding ongoing litigation-related charges; Avg. revenue per produced ton of coal increased 28% y-o-y to $65.78; Average produced coal revenue per ton increased 28% to $65.78; Q2 operating cash margin per ton increased 83% to $15.94; 28% increase in avg. realized prices on coal shipped in Q2 of $65.78 per ton vs. $51.40 per ton in Q2 2007; 1st half coal revenue of $1.25 billion; and a net loss of $51.4 million or $0.64 per share.
Massey also accompanied its commentary on second quarter operating results with forward looking guidance into the remainder of ‘09 and 2010. Important highlights include: Building out another 3 to 6 preparation plants and shipping load-outs over the next 2 years; Expects produced coal shipments of between 46.0 and 48.0 million tons in ‘09; Anticipated met coal output of between 13.0 to 14.0 million tons; Currently in possession of approximately 6 million tons of unsold or un-priced metallurgical quality coal for 2009; and 2009 cash costs anticipated in the $52.00 to $60.00 per ton range.
With close to 81 million shares outstanding and a P/E of 51.33, MEE closed 8/4/08 at $65.91. The stock has recently been upgraded by both Davenport and Standard & Poor’s and continues to attract investor interest as energy demand surges.
Peabody Energy (NYSE: BTU) 
Based in St. Louis Missouri, Peabody fuels approximately 2% of worldwide electricity generation and sold 248 million tons of coal in 2007 for total revenues of $4.6 billion. With 9.3 billion tons of proven and probable coal reserves as of 12/31/07 Peabody has a vested interest in 31 coal operations located in the U.S. and Australia, as well as joint venture rights to a Venezuelan mine.
Q2 Highlights include: $1.53 billion in revenue vs. $.107 billion in Q2 2007 (43% increase); Net income of $233.4 or $.86 per share beat analyst estimates on average of $1.5 billion in revenues and earnings per share of $.54; Expects ‘08 income from continuing operations between $2.50 and $3 per share; Sold 59.8 tons of coal during Q2 versus 57 during Q2 2007; 1st half earnings of $290.6 or $1.07 per share on revenues of $2.81; and Sold 121 million tons of coal in the 1st half of 2008 vs. 112.7 in ‘07.
BTU closed on 8/5/08 at $59.47; right in the middle of its 52-week range. With 272 million shares outstanding and a P/E of 44.95, analysts appear to be quite bullish on Peabody. John Kang (RBC Capital Markets) rates the stock “outperform” and recently raised his price target from $60 to $90.
Arch Coal, Inc. (NYSE: ACI)
The St. Louis Missouri-based company operates 18 mines in 7 states, owns or controls approximately 2.9 billion tons of proven and probable recoverable coal reserves and contributes approximately 12% of America’s coal supply. With properties in states including Colorado, New Mexico, Kentucky, West Virginia, Illinois, Wyoming, and Utah; Arch saw second quarter profits double and now believes that 2008 will be a record year.
Here are some of the company’s second quarter highlights: Total sales of 34.4 million tons of coal during Q2 vs. 33.3 in Q2 ‘07; Revenue increase of nearly 30% from $598.7 million in Q2 ‘07 to $785.1 million; Net income of $113 million, or 78 cents per share vs. $37.6 million, or 26 cents per share; Operating margin increase from $3.51 to $20.16; Operating margin per ton averaged $4.21 vs. $1.75; Average sale per ton of $21.04, vs. $16.42 during Q2 ‘07 and $18.49 in Q1 ‘08; First half earnings of $194.1M, or $1.34 per share, $66.3M, or 46 cents per share during the 1st half of 2007; and First half revenues of $1.48B vs. $1.17B during the 1st half of 2007.
With just over 144 million shares outstanding and a P/E of 23.17, ACI closed 8/4/08 at a price of $48.51. The company currently provides the fuel for about 6 percent of the electricity generated in the United States and hopes to see that number increase over the next two years.
Bullish Outlook on Both Sides of the Fence: With both corporate executives and independent industry analysts alike bullish on the company’s future potential, Arch Coal appears to be extremely well positioned to capitalize on the continued growth of the coal market. In a recent investor conference call, Arch chairman and CEO Steven Leer, was quoted as saying “We expect 2008 to be a record year for Arch”; and “Our tighter and stronger guidance is indicative of our confidence in the coal market fundamentals and in our ability to capitalize on these strong market trends“.
Coal Market Trends
For those of you interested in the plethora of trends currently impacting Quest’s business model, here are a few of the major ones:
1. Sustainable Demand
2. Emerging Nations: China and India account for nearly 50% of world coal use and are expected to lead a 73% leap in world coal demand to 2030 to 4,994 million tons of oil equivalent (mtoe) from 2,892 in 2005 (EIA Data)
3. Soaring worldwide steel demand - The price of U.S. steel-sheet reached a record price of $,1052 per ton in June up from $532 one year prior. Moreover, The International Iron and Steel Institute predicts overall industry growth of 6% during 2008.
4. Electricity demand - According to the World Coal Institute, Coal generates 40% of the world’s electricity. The institute also states that: “At current production levels, proven coal reserves are estimated to last 147 years. In contrast, proven oil and gas reserves are equivalent to around 41 and 63 years at current production levels respectively
5. Burgeoning U.S. export market - A number of factors in addition to those listed above are currently sparking the rebirth of the U.S. coal export market. Some of the most significant growth drivers include:
A weak U.S. dollar; Exorbitant ocean shipping costs ( this is forcing customers to absorb shipping costs entirely in many instances); Massive demand in emerging nations including China and India that are not capable of fueling their growth internally; China recently announcing plans to lower or eliminate coal import tariffs; and India will need 78,000 megawatts of new coal-fueled generation by 2012, requiring an additional 265 million tons of coal use in that country (Peabody Energy)
QMNM recently gained more than 4,000%, moving from $.0016 (6/19) to a high of $.075 (6/23). After a very positive day in the market today, all eyes will be on Quest again on Wednesday.
