James River Coal Company (NASDAQ:JRCC)

EBStroke (< 20) Submitted: 1/9/2013 9:32:13 PM : Start Price: $3.17 JRCC Score: -0.14

from Seeking Alpha:These 5 Commodity Stocks Could Drop Significantly In 2013, January 7, 2013 4) James River Coal (JRCC): The coal industry is undergoing a major transformation and the outlook for coal is not stellar, to say the least. It seems that this is not just a hiccup as the sector has to face several headwinds.On the one hand, the demand for thermal coal in North America is going to be severely hurt by both tighter environmental regulations and the glut of natural gas which has risen along with the increase in hydraulic fracturing of shale rock. In March 2012, the U.S. Environmental Protection Agency proposed the first limits on greenhouse-gas emissions from power plants, the largest source of carbon dioxide linked to climate change. The rules will permit emissions from new power plants at 1,000 pounds of carbon dioxide per megawatt-hour, about the level for a modern gas plant, the EPA said, effectively precluding construction of new coal-fired plants.According to the latest news, the things seem to deteriorate for the demand of thermal coal going forward as the Government plans new anti-coal regulations after the Presidential election.On the other hand, the demand for metallurgical coal in 2013 will also remain steady as China's economic growth has started to stabilize and its annual growth rate in 2013 will not be substantially different from 2012 levels. It is estimated that China's economy grew 7.5% in 2012, down from 9.2% in 2011 and 10.3% in 2010.The only hope for the met coal going forward comes from India but the Indian economy does not seem enough to save the game.Two recent events add two more ominous signs for the sector:a) St. Louis-based Patriot Coal (PCXCQ) filed for bankruptcy protection few months ago.b) Billionaire Wilbur Ross, who built a company from distressed U.S. coal assets and sold it last year for $3.4 billion, says the industry's current slump differs from earlier setbacks and may last for years because of the shale-gas boom.James River is primarily a thermal coal producer and the demand for thermal coal is expected to be hit more than coking coal demand in 2013 as mentioned above. The company trades well below its book value currently (PBV=0,4) but I believe this is a value trap as this producer has been losing money for the first three quarters of 2012.I do not expect the company to turn into profits in Q4 2012 as nothing has changed fundamentally during the last three months and eventually the operating cash flows will remain weak. Furthermore, EBITDA will most likely remain negative as they have been negative for the last 3 consecutive quarters. All these factors make the long term debt repayment difficult to handle