James River Still Faces Some Hurdles

James River Coal Company (NDAQ: JRCC) had been the darling of Wall Street until it crashed back down to earth as commodity prices unwound. Production at many U.S. coal mines is expected to increase substantially and help generate earnings and free cash flow growth for firms like James River Coal. The problem is that coal prices themselves have dropped largely due to hedge funds unwinding their leveraged positions in commodities. So, is there any hope left for the U.S. coal sector?

Analysts remain divided on U.S. coal companies at large. Jefferies & Co. initiated a buy on three companies including James River. The firm noted that James River could benefit from record high contracted steam coal prices while also predicting that it would generate profit and free cash flow in 2009 or 210 with some expansion in its Illinois Basic operations and higher net realized pricing to provide organic growth. This is all good news for organic growth within the United States.

Critics insist that one of the primary drivers of coal prices has been foreign demand. Many U.S. exporters had used the cheap dollar to export coal to countries like China that had huge needs. However, China's first drop in coal prices took place in October with the sliding price of crude oil and other commodities. Meanwhile, the dollar has been moving up relative to other currencies, which has put pressure on exports. Combined, this could be a bad sign for that half of the business.

In the end, coal looks to be in good shape domestically, but international slowdowns could put pressure on prices from the export side of things. On the plus side, the coming electricity consumption beak and limited hydropower in China should prop up the demand for thermal power in the fourth quarter. However, the higher dollar remains a problem as Australia may now be more competitive in its bids to ship to China to meet their needs.

Shares of James River Coal Company fell $2.73, or 14.72%, to $15.82 per share in mid-day trading.