James River Coal Company Coal (JRCC), CSX Corporation (CSX), Norfolk Southern Corp. (NSC): This Coal Miner Owns the Wrong Coal

James River Coal Company Coal (NASDAQ:JRCC)’s main operations are in the Central Appalachian coal basin (CAPP). That’s a region that’s experiencing a downward trend in demand. Although the company has tried to diversify into new coal markets, it’s probably not enough to fight this long-term shift.

The wrong coal

In its second-quarter conference call, the CEO of rail company CSX Corporation (NYSE:CSX) noted that in 2010, “about 12% of our coal originations on CSX were coming out of the Illinois Basin and this most recent quarter about 28%. And most of that coal has displaced Central Appalachian coal, which is down fairly significantly.”

CSX Corporation (CSX)

That’s a big shift and one that clearly has an impact on CSX Corporation (NYSE:CSX). The company earns more from carrying Illinois Basin coal (ILB) to customers that have switched away from CAPP coal because of the greater distance ILB coal has to travel on its lines. Even better, the company expects originations of ILB coal to go “a lot higher…”

Fellow train hauler Norfolk Southern Corp. (NYSE:NSC) recently highlighted a similar hauling shift on its train line. Of all the coal basins the company serves, the ILB is effectively the only one that has seen increased shipments since 2010, nearly doubling from 8% to 15% of second quarter shipments.

The biggest laggard was CAPP coal, falling five percentage points. That said, CAPP coal still makes up over one-third of the company’s business and requires a much longer haul than ILB coal at Norfolk Southern Corp. (NYSE:NSC). That suggests that this ongoing shift won’t be as kind to Norfolk Southern Corp. (NYSE:NSC)’s business as it will be to CSX Corporation (NYSE:CSX)’s.

Benefiting from the switch

This coal-basin shift is a trend that’s buffeted Alliance Resource Partners, L.P. (NASDAQ:ARLP), since ILB coal accounted for about 75% of its tons sold in the second quarter. Such basin-switching has allowed Alliance to increase production at the very time that others are pulling back. For example, in the second quarter, the partnership increased the tons it sold by more than 13%.

The ILB is the bedrock on which the company’s growth is pinned:  “The strong performance of our Illinois Basin operations through the first half of 2013 is expected to continue over the balance of the year.” And Alliance Resource Partners, L.P. (NASDAQ:ARLP) expects 2013 to be its “13th consecutive year of record results.”

The wrong focus

That’s not the case at James River Coal Company Coal (NASDAQ:JRCC). Central Appalachian coal accounts for around 80% of the company’s coal volume. With customers shifting their buying to the ILB, James River has seen its sales stall.

The company shipped nearly 25% less coal in the first six months of the year than it did in the same period last year. The drop in demand for CAPP coal accounted for all of that decline, since the company actually increased the tons sold out of its much smaller Midwest segment, which operates in the ILB.

This is why the company was forced to idle all production for a week and has switched its Kentucky operations to a four-day work week. James River Coal Company Coal (NASDAQ:JRCC) has a big problem on its hands. This problem appears to have worsened as the company announced on Monday that it would idle three more Kentucky mines and place around 525 on furlough. That’s roughly 25% of JRCC’s workforce.

Expansion at the wrong time

To its credit, James River Coal Company Coal (NASDAQ:JRCC) sees the writing on the wall. It attempted to make changes with the early 2011 acquisition of International Resource Partners. That purchase brought with it the “majority” of the company’s metallurgical coal business. That business operates out of the CAPP region and accounted for 36% of that division’s volume and 42% of its revenue in the second quarter.

The only problem is that met coal is also experiencing price and demand declines right now. In other words, James River Coal Company Coal (NASDAQ:JRCC) is in the midst of the perfect storm. There’s a reason why the stock is trading hands in the low single digits.

The only bright spot is the company’s Midwest division, which accounts for around 20% of its coal volume. That’s not enough over the long term and coupled with the many headwinds James River is dealing with, points to an industry player that you should probably avoid.

The article This Coal Miner Owns the Wrong Coal originally appeared on Fool.com and is written by Reuben Brewer.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, L.P.. The Motley Fool owns shares of CSX. 

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