us coal sector - research-doc.credit-suisse.com

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

13 April 2012Americas/United States

Equity ResearchDiversified Metals & Mining

US Coal Sector SECTOR FORECAST

Bouncing Along the Bottom After analyzing key trends for U.S. coal fundamentals over the next 12-24 months, and in conjunction with our global commodity team’s natural gas forecast revisions, we are revising estimates for all the coal companies, and downgrading Cloud Peak Energy (CLD) and Consol Energy (CNX) from Outperform to Neutral. We reiterate our Outperform rating on Peabody Energy (BTU), given its growing Australia asset base and exposure to met coal.

■ Are We Near the Bottom? The most common question that we expect to get from our earnings revisions is given the ~50% decline in the sector over the past year and the ~20% decline YTD, whether or not all the bad news is finally priced into the earnings, and are the stocks now nearing a bottom. In our view, the answer is probably, and that is why we are not downgrading the sector to underperform. But in our view street expectations are still too high, and earnings cuts in our view will be a headwind near-term.

■ U.S. Thermal Coal Fundamentals Unlikely to Improve Until 2H’13: While we have seen significant production cuts year to date, we see 3 signficant issues which will keep coal prices from moving higher over the next 12 months (and one of them is not low natural gas prices): 1) inventories, which we expect will remain well above levels of pricing power for the coal miners until 2H’13, 2) significant unpriced coal tonnage (50-55%) for 2013 and 3) spot prices which are at or below marginal cost, which suggests that 2013 contract negotiations will likely start at that level (ie: limited margin upside in 2013). The one bright spot is the export market, which will continue to grow after a flat 2012.

■ Still Expect a Met Coal Recovery: Conversely, we remain bullish on the prospects for met coal prices in the second half of 2012 (see full commodities team note for details). We believe the combination of 1) an acceleration in Chinese steel production, 2) supply constraints in Australia and 3) an improving global economy suggest that Q2 should mark the trough for met pricing in 2012. We again highlight BTU as our preferred way to play the met coal recovery.

■ Fairly Valued on Historical Valuations: On a historical multiples basis, we believe the coal stocks are fairly valued at our target prices, with only Peabody Energy (BTU) and Arch Coal (ACI) looking cheap on a relative basis vs. historical multiples (at a 10% discount to historical EV/EBITDA on our TP’s).

■ Downgrading CLD, CNX to Neutral: Given the weak thermal backdrop, we are downgrading both Cloud Peak Energy (CLD) and Consol Energy (CNX) from Outperform to Neutral. Using the CS HOLT framework tool also suggests both have limited upside from current levels. Reiterate Outperform Rating on Peabody Energy: Peabody Energy remains our top pick in the coal sector, due to BTU’s 1) Attractive Australian Asset Base, 2) Volume and Earnings Growth to 2015 and 3) its position as a Long-term Option proxy for the PRB.

Research Analysts

Richard Garchitorena, CFA 212 325 5809

[email protected]

Sean Wright, CPA 212 538 3284

[email protected]

13 April 2012

US Coal Sector 2

Executive Summary After analyzing key trends for U.S. coal fundamentals over the next 24-48 months, and in conjunction with our global commodity team’s reduction of natural gas price forecasts, we are downgrading both Cloud Peak Energy (CLD) and Consol Energy (CNX) from Outperform to Neutral. We maintain our Outperform rating on Peabody Energy (BTU).

Ratings Overview Exhibit 1: CS U.S. Coal Sector Coverage Universe

CurrentCompany Name Symbol Price Rating Revised Prior Upside 2013 2014Peabody Energy BTU 29.34$ OUTPERFORM $44.00 48.00$ 50.0% 6.2 5.5Cloud Peak CLD 15.41$ NEUTRAL $17.00 20.00$ 10.3% 4.2 4.4Consol Energy CNX 34.75$ NEUTRAL $40.00 45.00$ 15.1% 7.8 6.7Arch Coal ACI 10.63$ NEUTRAL $12.00 14.00$ 12.9% 6.5 6.1Alpha Natural Resources ANR 16.08$ NEUTRAL $18.00 22.00$ 11.9% 5.8 5.3

Target Price TP Multiple - EV/EBITDA

Source: Factset, Credit Suisse estimates

■ We have downgraded CLD and CNX from Outperform to Neutral, and lowered our target prices for each of the companies under coverage.

Exhibit 2: EPS Changes

Company Name Symbol Rating Revised Prior Var. Revised Prior Var. Revised Prior Var.Peabody Energy BTU OUTPERFORM $3.07 $3.48 -11.8% $4.31 $5.50 -21.7% $5.17 $6.33 -18.3%Cloud Peak CLD NEUTRAL $1.90 $1.90 0.0% $1.66 $1.98 -16.4% $1.48 $1.89 -21.8%Consol Energy CNX NEUTRAL $1.80 $2.00 -10.2% $2.15 $3.43 -37.3% $2.68 $4.47 -40.2%Arch Coal ACI NEUTRAL $0.59 $0.89 -33.6% $0.83 $1.31 -36.3% $0.99 $1.84 -46.1%Alpha Natural Resources ANR NEUTRAL -$0.11 $0.32 na -$0.01 $0.88 na $0.11 $1.05 -89.4%

20142012 2013

Source: Company data, our estimates

■ In conjunction with the global commodities team’s global revisions, as well as our adjustments to U.S. price forecasts, we have significantly lowered our earnings estimates for each of the coal companies under coverage for 2013 and 2014.

Exhibit 3: CS Estimates vs. Consensus

Company Name Symbol Rating CS Consensus Var. CS Consensus Var. CS Consensus Var.Peabody Energy BTU OUTPERFORM $3.07 $2.83 8.7% $4.31 $4.08 5.6% $5.17 $4.75 8.7%Cloud Peak CLD NEUTRAL $1.90 $2.01 -5.7% $1.66 $2.02 -18.0% $1.48 $1.66 -11.2%Consol Energy CNX NEUTRAL $1.80 $2.17 -17.1% $2.15 $2.75 -21.8% $2.68 $3.35 -20.1%Arch Coal ACI NEUTRAL $0.59 $0.76 -22.4% $0.83 $0.96 -13.3% $0.99 $1.37 -27.7%Alpha Natural Resources ANR NEUTRAL -$0.11 -$0.32 -64.7% -$0.01 $0.00 na $0.11 $0.51 -78.0%

2012 2013 2014

Source: Factset, Credit Suisse estimates

■ As a result, we are now below consensus for each of the coal companies under coverage from 2012 to 2014 with the exception of Peabody Energy, where we are above consensus.

13 April 2012

US Coal Sector 3

Are we There Yet? Exhibit 4: Share Performance (since Jan. 1, 2012) Exhibit 5: Share Performance (4/12/11 to 4/12/2012)

-8.1%

-17.5%

-22.2%

-28.4%-31.7%

-21.6%

-50%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

CNX BTU CLD ANR ACI Group Avg.

-33.1%

-72.9%

-58.1%

-28.7%

-70.4%

-52.6%

-80%-75%-70%

-65%-60%

-55%-50%-45%

-40%-35%-30%

-25%-20%

-15%-10%

-5%

0%5%

10%

15%

CNX ANR BTU CLD ACI Group Avg.

Source: Factset, Credit Suisse estimates Source: Factset, Credit Suisse estimates

(as of April 12, 2012)

The most common question that we expect to get from our earnings revisions is given the ~50% decline in the sector over the past year and the ~20% decline YTD, whether or not all the bad news is finally priced into the earnings, and are the stocks now nearing a bottom. In our view, the answer is probably, and that is why we are not downgrading the sector to underperform. But in our view street expectations are way too high, and earnings cuts in our view will be a headwind near-term.

Additionally, we do not expect the fundamentals that impact the coal industry will recover until at least 12-18 months from now, and even then we expect the recovery to be slow and modest at best, with the signficant inventory build driven by the mild winter and low natural gas prices unlikely to reach normal levels until 2014 at the earliest. The one bright spot is the export market, which we do continue to grow and minimize the surpluses within the U.S. over time.

Historical Valuations Quantify This

Exhibit 6: Historical Multiples vs. Current (2013)

Share Price

Target Price

Historical Multiple

Current Multiple

Premium/Discount

TP Multiple

Premium/Discount

Historical Multiple

Current Multiple

Premium/Discount

TP Multiple

Premium/Discount

BTU 29.34$ 44.00$ 18.1 6.8 -62% 10.2 -44% 6.8 4.8 -30% 6.2 -10%CLD 15.41$ 17.00$ 8.9 9.3 4% 10.2 15% 4.2 3.8 -8% 4.2 0%CNX 34.75$ 40.00$ 18.3 16.1 -12% 18.6 2% 8.0 7.0 -12% 7.8 -2%ACI 10.63$ 12.00$ 16.1 12.8 -21% 14.4 -10% 7.3 6.2 -15% 6.5 -11%ANR 16.08$ 18.00$ 22.5 n/a n/a n/a n/a 6.0 5.4 -9% 5.8 -3%Avg. 16.8 11.3 -23% 13.4 -9% 6.5 5.5 -15% 6.1 -5%

P/E EV/EBITDA


We believe the best way to gauge what the shares are pricing in is by looking at historical valuation. On this metric, we note that on our target prices, the coal stocks now look fairly valued relative to historical multiples, with only Peabody Energy (BTU) and Arch Coal (ACI) looking cheap on a relative basis vs. historical multiples.

We also looked at these multiples based on assuming forward curve prices, and on this basis the names are trading at a discount. However as we highlight through this report, we do not think forward curve prices will be achievable in 2013, given the many headwinds facing the coal producers (low nat. gas prices, record inventory levels, signficant unpriced tonnage in 2013).

13 April 2012

US Coal Sector 4

Coal Price Forecast Changes Exhibit 7: Summary of Coal Forecast Changes

2014 LT

Q1 Q2 Q3 Q4 Yr Avg Q1 Q2 Q3 Q4 Yr Avg Yr Avg (real)

Coking Coal (contract)

Hard coking coal (US$/t) 235 210 225 235 226 245 240 235 235 239 235 170

previous 235 220 235 245 234 245 240 235 235 239 235 170

Semi hard coal (US$/t) 223 200 214 223 215 233 228 223 223 227 223 160

previous 223 209 223 233 222 233 228 223 223 227 223 160

Semi soft coal (US$/t) 157 141 151 157 151 164 161 157 157 160 157 134

previous 157 147 157 164 156 164 161 157 157 160 157 134

PCI coal (US$/t) 169 153 164 172 165 179 175 172 172 174 172 134

previous 169 158 169 176 168 176 173 169 169 172 169 134

Thermal Coal

US Thermal - PRB 8800 US$/ton 10 10 10 10 10 12 12 12 12 12 13 14

previous 10 10 10 10 10 13 13 13 13 13 15 14

US Thermal - NAPP/CAPP US$/ton 62 62 62 62 62 60 60 60 60 60 65 70

previous 62 62 62 62 62 70 70 70 70 70 75 70

US Thermal - Western Bit US$/ton 35 35 35 35 35 35 35 35 35 35 40 45

previous 40 40 40 40 40 40 40 40 40 40 40 45

US Thermal - Illinois Basin US$/ton 30 30 30 30 30 42 42 42 42 42 45 45

previous 40 40 40 40 40 42 42 42 42 42 45 45

Thermal Coal (Newcastle FOB) US$/t 113 110 115 115 113 120 125 125 130 125 130 120

previous 115 125 130 135 126 138 138 138 138 138 140 120

Thermal Coal (API#2 CIF) US$/t 100 105 110 110 106 115 120 120 125 120 125 120

previous 113 123 128 133 124 136 136 136 136 136 138 120

Thermal Coal (API#4 FOB) US$/t 105 105 110 110 108 115 120 120 125 120 125 120

previous 110 120 125 130 121 134 134 135 135 135 138 120

2012 2013

Source: Credit Suisse estimates

13 April 2012

US Coal Sector 5

U.S. Coal Industry Update Limited Downside Risk, in Our Opinion, but also Limited Upside While the weakness in thermal coal industry fundamentals is widely known, with the 22% decline YTD in the coal sector a clear reflection of this, given our commodities team’s reduction of natural gas price forecasts to levels well below the theoretical coal to gas switching price (which for Capp is ~$4.50/mmbtu), we thought it was appropriate to revisit the recent drivers of coal price weakness from 1) a supply/demand perspective, 2) a sustainability perspective, and 3) an earnings implications perspective. Specifically, we looked at the downside based on the assumption that marginal cost of coal production will set the floor for pricing (assuming that coal producers that are operating above that marginal cost disappear due to basic economics).

Conclusion: What we found was that 1) actual EIA production data suggests the cuts are greater than what has been announced, but even then the production cuts are still not enough to balance the oversupplied market, 2) inventories are 30-40% above normal levels (ie: where coal producers have pricing power) and will likely stay there until at least 2H’2013, and 3) this suggests that price negotiations for 2013 will likely start around the marginal cost of production level (ie: limited margin upside). With over 50-55% of thermal production still not contracted for 2013, in our view the likelihood is that the coal producers will not be able to capture current forward curve prices until 2014 at the earliest.

Stock Implications: Given the potential risks of 1) reduced 2012 production volumes, 2) reduced 2013 thermal price expectations, 3) the potential for natural gas prices to continue to surprise to the downside, and 4) the potential for reduced drilling schedules for natural gas as a result (see Arun Jayaram, Stefan Reveille and Jan Stuart’s note titled “US Natural Gas Reservoir: Fuel Switching to Cheap Gas”, published April 10 for more details), we believe consensus estimates remain too high for the bulk of the U.S. coal producers. As a result we are downgrading CNX and CLD to Neutral. We maintain our relative preference for Peabody Energy, given its Australia exposure, attractive growth profile and longer-term PRB upside.

Exhibit 8: 2012 EPS Estimates – CS vs Consensus Exhibit 9: 2013 EPS Estimates – CS vs Consensus

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

PeabodyEnergy

Cloud Peak Consol Energy Arch Coal Alpha NaturalResources

CS Estimates Consensus

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

PeabodyEnergy

Cloud Peak Consol Energy Arch Coal Alpha NaturalResources

CS Estimates Consensus

Source: Company data, our estimates Source: Company data, our estimates

13 April 2012

US Coal Sector 6

Supply/Demand Perspective Surpluses Expected to At Least 2015

Exhibit 10: US Coal Supply-Demand Through 2015

-70,000

-60,000

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

E20

14E

(in th

ousa

nd to

ns)

Source: EIA, our estimates

While there are a multitude of variables that impact the market balance, our Base Case Assumptions for Supply/Demand suggest that the U.S. coal market will remain in a modest surplus of 10m to 20m tons until 2015, unless we get more significant production cuts.

Supply: Better, But More Production Cuts Still Needed

It appears that the coal producers have already started to show production discipline, with EIA data to the end of March suggesting a run rate of over 66m tons (or ~6%) of lower production vs. 2011, vs. only approximately 25m tons of total announced production cuts from public companies since last November. We believe this difference is a function of reduced utilization at existing mines by public producers, as well as unannounced production cuts taken by private coal producers.

Exhibit 11: Announced Coal Production Cuts from Public

Companies

Exhibit 12: Implied Production Cuts from EIA Production

Data Date Company Ticker Total4-Nov-11 Arch Coal ACI 1.513-Jan-12 Patriot Coal PCX 113-Jan-12 Walter Energy WLT 1.2524-Jan-12 Teco Energy TE 1.36-Feb-12 Alpha Natural Resources ANR 410-Feb-12 Arch Coal ACI 3.524-Feb-12 Alpha Natural Resources ANR 5.528-Feb-12 Consol Energy CNX 4.31-Mar-12 Rhino Resources RNO 16-Mar-12 Consol Energy CNX 1.8

Total 25.15

Region 3/31/2012 3/31/2011 % Change

Appalachian 81,305 87,311 -6,006 -6.9%Interior 39,814 41,483 -1,669 -4.0%Western 135,963 144,829 -8,866 -6.1%U.S. Total 257,082 273,623 -16,541 -6.0%

Region % ChangeAppalachian 325,220 349,244 -24,024 -6.9%Interior 159,256 165,932 -6,676 -4.0%Western 543,852 579,316 -35,464 -6.1%U.S. Total 1,028,328 1,094,492 -66,164 -6.0%

Year To Date Coal Production

Implied 2012 Production Lost

Source: Company data, our estimates Source: EIA, our estimates

13 April 2012

US Coal Sector 7

Will Supply Decline further?

Will production cuts intensify to down 10% for 2012? If they did, then we would view this as signficantly bullish, as it would put the U.S. market into deficit. However, while some additional thermal cuts from higher cost private producers are possible, we believe significantly larger cuts are unlikely, given the almost fully contracted positions of the thermal coal producers with the utilities (90-100% on average). Additionally, the resilience in U.S. exports so far this year, as well as the recent pickup in met coal pricing globally (spot met coal prices to China recently indicated at $214/tonne vs. $210/tonne last week) suggest that met coal demand may be starting to rebound, which could bring back some of the hot idled met coal production (estimated at 6-7m tons) on line.

Demand Unlikely to Rebound Near-term

While we acknowledge that ~66m tons of annualized production cuts is significant, we saw higher levels of production cuts in 2009, at 97 million tons. Additionally, there is no guarantee that this run rate will be maintained through the rest of the year, especially if met coal prices start to rally in 2H’12 as we are forecasting. Nonetheless, excluding met coal gains we believe thermal coal prices will remain under pressure, and as such expect modest surpluses through 2015. We are assuming coal demand to decline -7% in 2012, -1.3% in 2013, -2% in 2014 and -1.5% in 2015.

For 2012, we expect 60-80m tons of lower demand vs. 2011 from the combination of 1) additional coal to gas switching, which we estimate at roughly 30-40m tons vs. 2011, 2) lost demand from scheduled coal-fired power plant retirements, which for 2012 is roughly 10-20m tons, and 3) deferred tonnage by the utilities due to force majeure, renegotiated terms, or refusal of delivery to make up the difference.

Secular Demand Declines Unlikely to Reverse

Our CS Utilities team (Dan Eggers, Kevin Cole and team) expect the secular decline for coal demand from coal fired power plants to continue through 2025, as already announced coal-fired retirements and stricter EPA regulations continue to shift utiliities away from coal to alternative fuel sources. The team estimates that 38 GW of coal-fired plants are already slated to retirement, but expect additional announcements in the coming quarters to take the total to 60 GW of capacity to be shut in by 2025. This is likely to be somewhat offset by some 10 GW of announced coal plant additions (primarily to be completed by next year). As a result, we estimate the overall net thermal coal demand should be between 20 to 60m tons lower by 2016 (ie: 2 to 6% below 2011 levels), and 30 to 65m tons by 2025 (or close to 100m tons if the new coal plants do not end up being completed).

Exhibit 13: Estimated tons lost from Coal-fired plant Retirements (to 2016) 2011 2012 2013 2014 2015 2016 Total 2017-2025 Total

Announced Coal-fired GW lost (to 38 GW) 3.9 7.8 3.2 8.5 6.7 0.7 30.8 7.0 37.7Implied tons (milllions) 6.3 12.7 5.1 13.8 10.8 1.2 49.8 11.3 61.1

Additional Potential Lost Coal-fired GW 0.0 4.0 4.0 5.0 5.0 4.0 22.0 0.0 22.0Implied tons (milllions) 0.0 6.5 6.5 8.1 8.1 6.5 35.6 0.0 35.6

l Potential Lost Coal Demand (No New Plants) 6.3 19.1 11.6 21.9 18.9 7.6 85.5 11.3 96.8Announced Coal-fired GW Additions 0.0 0.0 6.0 1.7 1.7 0.0 9.4 1.2 10.6

Implied tons (milllions) 0.0 0.0 18.3 5.1 5.1 0.0 28.5 3.7 32.2Total Potential Lost Coal Demand (@ 38GW) 6.3 12.7 -13.2 8.7 5.7 1.2 21.3 7.6 28.9Total Potential Lost Coal Demand (@ 60GW) 6.3 19.1 -6.7 16.8 13.8 7.6 56.9 7.6 64.5

Source: CS Utilities team, our estimates

Exports: The Lone Bright Spot

As mentioned earlier, amid this weak domestic backdrop, we believe the one bright spot for coal demand will remain exports (both met and thermal), which we expect will rebound in the coming years due to our house view of continued global coal demand growth for both thermal and met coal over to 2015 (thermal demand to grow by 29% from 2011 to 2015, and met coal demand to grow by 29% from 2011 to 2015).

13 April 2012

US Coal Sector 8

Exhibit 14: Global Seaborne Thermal Coal Demand Exhibit 15: Global Seaborne Met Coal Demand

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

2011 2012e 2013e 2014e 2015e

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

2011 2012e 2013e 2014e 2015e


As a result, while we are assuming a 3% reduction in U.S. net exports in 2012, we expect 6-14% annual growth in net exports from 2013 to 2015 to drive total exports to over 135m tons by 2015 (net exports to 123m tons).

Exhibit 16: Total US Coal Exports 1973-2015E

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

Source: EIA, our estimates

We believe U.S. port capacity will be able to keep pace, given the current expansions and announced capacity additions planned over the next 3 years.

13 April 2012

US Coal Sector 9

Exhibit 17: US Coal Export Terminal Capacity

Terminal Location Owner Capacity2 - 5 Year

ExpansionsEast CoastLamberts Point Pier XI Norfolk, VA N-S 30Pier IX Newport News, VA Kinder Morgan 12 3Dominion Terminal Associates Newport News, VA ANR, ACI, BTU 19CNX Marine Terminal Baltimore, Md CNX 14 14Chesapeake Bay Piers Maryland CSX 4Fairless Hills Pennsylvania Kinder Morgan 3Charleston, SC South Carolina State of South Carolina 3Subtotal 82 20

Gulf/MexicoIMT Myrtle Grove, La Kinder Morgan 6 6Convent Marine Terminal Convent, La Foresight Energy 5 3United Bulk Terminal Davant, LA United Marine Group 17McDuffie/State-owned Coal Terminals Mobile, AL State of Alabama 10 6Corpus Christi Corpus Christine, TX State of Texas 0 2Burnside Terminal Burnside, Missisippi Trafigura 0 10Port of Houston Houston, Tx Kinder Morgan 0 2Port of Lazaro, Mexico Cardenas, Mexico Terminales Portuarias del Pacifico 0 3Subtotal 38 32

West/BC**Gateway Pacific Terminal Bellingham, WA BTU and SSA Marine 24Oxbow Long Beach, CA Oxbow 2Seward Coal Terminal Seward, Alaska Alaska Railroad Corp 2Ridley Terminal Prince Rupert, BC, Canada Govt. of Canada 3 4Westshore Terminal Roberts Bank, BC, Canada Westshore 6Subtotal 12 28

Total 131 79 Source: Company data, our estimates

Are Low Prices Sustainable? Given our expectation of significant production cuts narrowing the surplus, the question is will a tighter market will result in a better negotiating position for the coal producers, resulting in higher coal prices in 2013? In our view, the short answer is no.

We see 3 signficant issues which will keep coal prices from moving higher for the next 12 months (and one of them is not low natural gas prices): 1) inventories which we expect will remain well above normal, above levels of producer pricing power until the end of 2013, 2) significant unpriced coal tonnage for 2013 and 3) marginal costs which are essentially at current CS price assumptions (ie: below the forward curve).

13 April 2012

US Coal Sector 10

1) Coal Inventories Unlikely to Destock to Pricing Power Levels

Exhibit 18: Historical Avg. Coal Inventories at the Utilities (with 2012-2013E)

148 146

182

126127

138142

140

131125 125

130 132 130126

125

132

142138

134136

142147

142

171166

172

182 183

174

159

150154

166

176 175

191

201

212 213207

194

179175 177

182 181

90

100

110

120

130

140

150

160

170

180

190

200

210

220

230

240Ja

n

Feb

Mar

Apr

May Jun

Jul

Aug Se

p

Oct

Nov

Dec

(in m

illio

n to

ns)

1990-2002 average 2003-2010 average 2010-2011 average 2012 Forecast 2013 Forecast

2012 Forecasts


Due to the combined negative impacts of 1) a milder than normal winter and 2) as a function, weak natural gas prices, we ended January with coal inventories were at 182m tons, or 32% above normal inventory levels over the past 10 years. With the end of winter remaining abnormally mild (~5% above normal temps for Q1’12), we expect coal inventories continued to build to 200m tons by March, nearing the record high of 204m tons seen in Nov. 2009.

Based on our supply/demand expectations, we believe inventories will reach maximium capacity levels at the utilities by April/May (roughly 210-215m tons), before declining through the back half of the summer to more reasonable levels during the Fall shoulder season. However at 175m tons inventories would still be 20-25% above normal levels, with pricing power not seen until inventories dropped to ~130-140m tons, or 50-60 days of supply (vs. current at 76 days). Thus, even if we only look at inventories alone as a proxy for pricing power, we do not expect prices to materially improve until at least 2013. This brings us to the second problem, which is the significant level of unpriced tonnage still open for 2013.

2) 2013 Unpriced Thermal Tons Will Keep a Ceiling on Price

Exhibit 19: US Coal Companies – 2012/2013 Volume Percentage Priced and Committed

Thermal Met Total Thermal Met Total Thermal Met Total Thermal Met TotalArch Coal 89% 54% 86% 47% 0% 43% 122 5 127 63 - 63 Consol Energy 100% 45% 93% 49% 3% 41% 48 4 52 24 0 24 Alpha Natural Resources 100% 53% 92% 50% 2% 39% 89 11 101 43 0 43 Peabody Energy (US only) 100% 21% 95% 50% 0% 46% 195 3 198 96 - 96 Cloud Peak 93% na 93% 62% na 62% 89 na 89 58 na 58

Percentage Priced Tons Committed (Estimated)2012 2013 2012 2013

Source: Company data, our estimates *Based on CS volume assumptions for 2012 and 2013

13 April 2012

US Coal Sector 11

As Exhibit 19 shows, the U.S. coal producers have signficant tonnage still left unpriced for 2013, ranging from an average 50-53% unpriced for each (with the exception of CLD at 38% priced). We believe that this will also play a factor in the negotiated prices that coal producers will be able to lock in with utilities, as the advantage is clearly in the hands of the buyers.

3) Marginal Costs: A Floor or a Ceiling?

The third factor which we expect will limit the upside in thermal coal prices is the theoretical concept of marginal cost acting as a floor for pricing over time. While this would normally be supportive of the fact that prices are nearing a floor, given the ample supplies of coal both from an inventory perspective and a potential supply response perspective, we see little reason to expect a scenario other than negotiated prices ending up at that level of marginal costs, and not where the forward curve is currently suggesting.

Exhibit 20: PRB Coal Production by Company Type Exhibit 21: Appalachian (Capp and Napp) Coal Production

by Company Type

86.6%

13.4%

% Public% Private

65%

35%

% Public

% Private


In Exhibits 22 and 23, we attempt to estimate the level of marginal cost of production in 2 basins represented by public companies: 1) the PRB, whose production basis is 87% represented by the public coal companies, and 2) Appalachia (CAPP and NAPP), which is comprised of the 65% of public coal producers that report.

Exhibit 22: PRB Marginal Costs and Prices Exhibit 23: CAPP/NAPP Marginal Costs and Prices

$11.48

$8.40

$11.25

$13.75

$-

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

PRB

2012 Cash Cost Est. Current Spot 2013 Forward Price 2014 Forward Price

$60.19 $58.50

$68.75

$75.90

$30

$40

$50

$60

$70

$80

$90

CAPP/NAPP

2012 Cash Cost Est. Current Spot 2013 Forward Price 2014 Forward Price

Source: Company data, our estimates. Based on cash cost data for

ACI, ANR, BTU and CLD

Source: Company data, our estimates. Based on cash cost data for

ACI, ANR, CNX, JRCC, RNO, ALRP

Exhibits 22 and 23 show our estimates for the current cash cost for all of the public companies with available disclosure. We conclude that at current PRB spot prices (which

13 April 2012

US Coal Sector 12

in our view is illiquid and not representative of meaningful transactions), even the largest producers (BTU, ACI, CLD are actually operating below marginal cash cost. This would suggest that the 2013 forward curve price would be representative of the likely negotiated price level for 2013 commitments.

However in Appalachia, we estimate that the average cash cost for the 65% of production represented by public companies is roughly $60/ton, which is 20% below the current 2013 forward curve price of almost $70/ton. Again, given the signficant excess inventory levels, relatively weak natural gas prices (ie: still uneconomic to burn CAPP coal at $3.60/mcf) and significant unpriced positions, we believe that utilities will likely take advantage of the situation and pay just enough to keep the coal producers afloat, but nothing more. Thus, in this situation the high cost, private producers will likely be under pressure to survive as we believe the top quartile of coal producers would be operating at cash costs in excess of $65/ton, which could result in further production cuts due to bankruptcies if prices remain at depressed levels. Either way, we do not see significant upside in 2013 price settlements relative to marginal cost.

Earnings Implications/Scenario Analysis One question we expect to get is the question of whether all this negative sentiment is already priced in. To answer this, and taking the previous analysis on marginal costs a step further, we thought it would be useful to look at earnings scenarios for 3 different scenarios: 1) current CS estimate, 2) marginal cost price, and 3) forward curve prices.

Exhibit 24: CS Scenario Analysis – Pricing Assumptions

Price Assumptions Marginal Cost Current Est. Forward Curve Marginal Cost Current Est. Forward CurveNAPP/CAPP $60.00 $60.00 $69.75 $60.00 $65.00 $77.00PRB (8800) $11.50 $12.00 $11.40 $11.50 $13.00 $14.00Western Bit $32.25 $35.00 $37.00 $32.25 $40.00 $44.00Illinois Basin $32.50 $42.00 $45.00 $32.50 $45.00 $48.00

2013 2014


Exhibit 24 has our price assumptions for the analysis. For simplicity and given our more positive view on met coal, in each of these scenarios we are keeping our met coal price forecasts constant at the CS benchmark assumption of $239/tonne in 2013 and $235/tonne in 2014.

Exhibit 25: 2013 EPS Scenario Analysis Exhibit 26: 2014 EPS Scenario Analysis

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

BTU CLD CNX ACI ANR

Marginal Cost Current Estimates Forward Curve

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

BTU CLD CNX ACI ANR



13 April 2012

US Coal Sector 13

Exhibit 27: 2013 EBITDA Scenario Analysis Exhibit 28: 2014 EBITDA Scenario Analysis

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

BTU CLD CNX ACI ANR


$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

BTU CLD CNX ACI ANR



Exhibit 29: CS Scenario Analysis – Multiples 2013/2014

Marginal Cost

Current Est.

Forward Curve

Marginal Cost

Current Est.

Forward Curve

Marginal Cost

Current Est.

Forward Curve

Marginal Cost

Current Est.

Forward Curve

BTU 8.3 6.3 6.1 5.4 4.6 4.5 10.1 5.3 4.9 5.9 4.1 3.9CLD 12.6 9.1 9.9 4.6 3.8 3.9 n/a 10.2 8.4 14.4 4.0 3.5CNX 17.0 15.7 11.7 7.1 6.9 5.9 15.0 12.6 8.9 6.4 5.9 4.9ACI n/a 11.9 20.1 10.3 6.1 6.1 n/a 10.0 5.5 9.3 5.7 4.6ANR n/a n/a 21.8 7.1 5.1 4.3 n/a 131.5 12.2 11.0 4.7 3.7Avg. 12.6 10.7 13.9 6.9 5.3 4.9 12.6 33.9 8.0 9.4 4.9 4.1

EV/EBITDA2013 2014

P/E EV/EBITDA P/E


Historical Valuation

Finally, we look at historical multiples, and conclude that even in our conservative price forecast assumptions (ie: CS Base case), each of the companies (with the exception of CLD and BTU) look fairly priced. If prices drop to marginal cost in 2013, then each of the coal companies under coverage look expensive on a multiples basis relative to historicals and current. Only when assuming the forward curve prices do the stocks look cheap relative to historical EV/EBITDA multiples of 5.0 to 7.0x 1 year forward (Exhibit 30).

Exhibit 30: Historical 1 year forward multiples vs scenario analysis multiples

Share Price

Historical Multiple

Marginal Cost

CS Estimate

Forward Curve

TP Multiple

Historical Multiple

Marginal Cost

CS Estimate

Forward Curve

TP Multiple

BTU 29.34$ 18.1 8.9 6.8 6.6 10.2 6.8 5.6 4.8 4.7 6.2CLD 15.41$ 8.9 12.9 9.3 10.2 10.2 4.2 4.7 3.8 4.0 4.2CNX 34.75$ 18.3 17.5 16.1 12.0 18.6 8.0 7.3 7.0 6.0 7.8ACI 10.63$ 16.1 n/a 12.8 21.6 14.4 7.3 10.6 6.2 6.3 6.5ANR 16.08$ 22.5 n/a n/a 23.9 n/a 6.0 7.5 5.4 4.5 5.8Avg. 16.8 13.1 11.3 14.8 13.4 6.5 7.1 5.5 5.1 6.1

EV/EBITDAP/E2013


13 April 2012

US Coal Sector 14

Americas / United StatesDiversified Metals & Mining

CONSOL Energy Inc. (CNX)

A Tale of Two (Weak) Markets ■ Downgrading to Neutral: We are downgrading CNX from Outperform to Neutral,

and lowering our target price from $45 to $40. While the shares have outperformed its coal peers by ~12% YTD, we believe 1) weaker near-term natural gas prices, 2) the ongoing idling at Buchanan and 3) 2012/2013 earnings guidance risk suggest the shares are likely rangebound near-term.

■ EPS and TP Revisions: We are lowering our 2012 estimate from $2.00 to $1.80, our 2013 estimate from $3.43 to $2.15, and our 2014 estimate from $4.47 to $2.68 to reflect the revised natural gas and coal price forecasts. We are lowering our target price from $45 to $40, which reflects 7.8x our 2013 and 6.7x our 2014 EBITDA estimate.

Reasons for the Neutral Rating:

■ 1) Lower Natural Gas Prices For a While: As our Commodities Team details in their note, the outlook for natural gas prices remains weak for the foreseeable future. The CS Global Commodities Research team revised its 2012 natural gas price forecast from $3.50/Mcf to $2.64/Mcf, its 2013 estimate from $4.70/Mcf to $3.70/Mcf and Lterm from $5.50/Mcf to $4.50/Mcf.

■ 2) Near-term Earnings Risk: We believe the street is too optimistic on results, given our view on near-term coal and nat gas fundamentals, higher costs from the Buchanan idling and the risk of further reductions to natural gas drilling schedules. As a result, we think it is unlikely the stock will outperform its peers near-term (especially its met coal peers), given the recent strength in met coal, and a nat gas environment which remains challenging.

■ 3) Multiemployer Pension Could Pose a Greater Risk than Perceived: Given our bearish view on coal fundamentals, we believe the multiemployer pension issue could result in CNX potentially getting stuck with a greater portion than it is currently responsible for, and is an issue with other peers do not have to deal with. Increase in Contributions: Additionally, we expect modest cost increases related to the coal pension trust could come as soon as Q3.

Share price performance

3136414651

Apr-11 Jul-11 Oct-11 Jan-12

Daily Apr 14, 2011 - Apr 12, 2012, 4/14/11 = US$50.28

Price Indexed S&P 500 INDEX

On 04/12/12 the S&P 500 INDEX closed at 1387.57

Quarterly EPS Q1 Q2 Q3 Q4 2011A 0.84 0.75 0.72 0.70 2012E 0.55 0.32 0.33 0.60 2013E 0.62 0.54 0.41 0.58

Financial and valuation metrics

Year 12/11A 12/12E 12/13E 12/14EEPS (CS adj.) (US$) 3.03 1.80 2.15 2.68Prev. EPS (US$) — 2.00 3.43 4.47P/E (x) 11.5 19.3 16.1 13.0P/E rel. (%) 79.1 144.5 136.2 121.9Revenue (US$ m) 5,896.7 4,758.3 5,274.5 5,784.5EBITDA (US$ m) 1,778.7 1,358.0 1,539.8 1,796.5OCFPS (US$) 6.00 4.24 4.90 5.82P/OCF (x) 6.1 8.2 7.1 6.0EV/EBITDA (current) 6.0 7.9 7.0 6.0Net debt (US$ m) 2,822 2,934 2,471 2,228ROIC (%) 14.29 8.79 9.77 11.40

Number of shares (m) 227.54 IC (current, US$ m) 6,433.26BV/share (Next Qtr., US$) 16.3 EV/IC (x) 1.6Net debt (Next Qtr., US$ m) 2,853.0 Dividend (Next Qtr., US$) 0.13Net debt/tot cap (Next Qtr., %) 76.9 Dividend yield (%) 0.36

Source: Company data, Credit Suisse estimates.

*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts


[email protected]


[email protected]

Rating (from Outperform) NEUTRAL* Price (12 Apr 12, US$) 34.75 Target price (US$) (from 45.00) 40.00¹ 52-week price range 54.82 - 31.70 Market cap. (US$ m) 7,907.05 Enterprise value (US$ m) 10,840.85

13 April 2012

US Coal Sector 15

Investment Thesis Reasons for the Neutral

(1) Most Exposed to Weak Natural Gas: As our Commodities Team details in their note (Click here for note), the outlook for natural gas prices remains weak for the foreseeable future. With CNX’s rising exposure to natural gas production (from 150Bcf in 2011 to 350Bcf by 2015), and our cautious view on prices, we do not see a near-term catalyst the shares other than a hotter than normal summer. We also believe that the company’s 2015 production target of 350 bcf is also at risk, with the potential of a slower rig count acceleration as not priced into the shares.

Exhibit 31: Credit Suisse NYMEX Henry Hub price forecasts

2011 Q1 Q2 Q3 Q4 Yr Avg Q1 Q2 Q3 Q4 Yr Avg Q1 Q2 Q3 Q4 Yr Avg LTForecast 4.04 2.77 2.20 2.50 3.10 2.64 3.60 3.40 3.80 4.00 3.70 4.40 4.20 4.20 4.35 4.29 4.50Previous 4.04 3.20 3.30 3.60 3.90 3.50 4.60 4.50 4.80 4.90 4.70 5.10 5.50Net Change -0.43 -1.10 -1.10 -0.80 -0.86 -1.00 -1.10 -1.00 -0.90 -1.00 -0.81 -1.00% Change -13.4% -33.3% -30.6% -20.5% -24.6% -21.7% -24.4% -20.8% -18.4% -21.3% -15.9% -18.2%

Consensus 3.24 3.30 3.73 3.33 4.50 4.00 3.80 4.50Net Change -1.04 -0.80 -0.63 -0.69 -0.90 -0.60 -0.10 -0.21% Change -32.1% -24.2% -16.9% -20.7% -20.0% -15.0% -2.6% -4.7%

Fwd Curve 2.19 2.45 2.85 2.57 3.57 3.37 3.5 3.69 3.53 4.10 3.85 3.92 4.09 3.99Net Change 0.01 0.05 0.25 0.07 0.03 0.03 0.30 0.31 0.17 0.30% Change 0.5% 2.0% 8.8% 2.7% 0.8% 0.9% 8.6% 8.4% 4.8% 7.5%

2012 2013 2014

Source: Bloomberg, our estimates

(2) Near-term Earnings Risk: We believe the street is too optimistic on results, given our bearish view on near-term coal and nat gas fundamentals, higher costs from the Buchanan idling and the risk of further reductions to natural gas drilling schedules. The shares of CNX have outperformed its peers by ~12% YTD, and ~12% since the beginning of March. Finally on a valuation basis, CNX is trading at 7.0x our 2013 EBITDA estimate, or a ~27% premium vs. its peers. As a result, we believe the stock is priced for perfection, and if we are right about the direction of natural gas prices over the next couple of months, we think the stock’s relative Outperformance vs. its coal peers will narrow. We look to the company’s next production report, due mid-April as a potential catalyst.

(3) Multiemployer Pension Could Pose a Greater Risk than Perceived:

■ Concentration Risk: As we highlighted in our March 26 report “Multiemployer Pensions, Add Coal to the Pile”, we would highlight the significant concentration risk within the coal industry, with CNX, ANR, Patriot Coal (PCX, NOT RATED) as some of the primary contributors to the 1974 Pension Trust. This concentration increases the interdependence of these companies to remain solvent and contributors to the plan. Given our bearish view on coal fundamentals, any financial concerns from one of the big contributors could result in a “house of cards scenario”, with CNX potentially getting stuck with a greater portion than it is currently responsible for.

■ Potential Increase in Contributions: Additionally, we expect modest cost increases related to the coal pension trust could come as soon as Q3, as the 1974 Pension trust requires a funding improvement plan to be put in place by May 25, 2012. Additionally, the 1974 Pension Trust, is already considered “seriously endangered” (ie: 65-80% funded), with fair market values

13 April 2012

US Coal Sector 16

Exhibit 32: Estimated Share of Multiemployer Pension Plan Underfunding More than 5% of

Market Cap1 US$ in millions

Company Ticker

Multiemployer Pension

Contribution 2011

Estimated Share of

Multiemployer Underfunding

After-Tax Multiemployer

Underfunding / Market Cap Safeway Inc SWY $263 $(6,954) (76.1%)

Dean Foods Co DF 30 (721) (21.2%)

United Parcel Service Inc B UPS 1,243 (21,505) (18.6%)

Quanta Services Inc PWR 47 (1,042) (14.8%)

CONSOL Energy Inc CNX 36 (1,186) (10.0%)

United States Steel Corp X 63 (576) (8.7%)

Alpha Natural Resources ANR 15 (388) (6.6%)

Patriot Coal PCX 24 (847) (95%) 1Market cap as of March 16, 2012

Note: We did not include multiemployer OPEB and foreign multiemployer pension plans in our analysis.

Source: CS Accounting & Tax Team, Company data, Form 5500 filings, Credit Suisse estimates

(4) HOLT Valuation suggest a Neutral Rating: CFROI® is an approximation of the economic return, or an estimate of the average real internal rate of return earned by a firm on the portfolio of projects that constitute its operating assets. In the exhibit below, we look at the HOLT™ methodology to get a sense of whether a firm is creating economic wealth. Economic wealth is created if CFROI is greater than the discount rate (which is a measure of a firm’s real cost of capital).

Using Credit Suisse’s Holt Framework, Consol Energy appears fully valued at current levels, with a warranted price of $35.85 based on a forecast CFROI of 7.13%. We believe this assumption is fair, given the current uncertainty around the long-term natural gas price, and the level at which coal prices will find a bottom relative to historical levels (average CFROI for most recent 5 years was 6.9%).

Exhibit 33: CNX HOLT Relative Wealth Chart

Source: Credit Suisse HOLT, Credit Suisse estimates

Based on consensus estimates, HOLT assumes a warranted price of $35.85 for CNX, based on a forecast CFROI of 7.13%. We feel this assumption is fair, given the company’s historical 5 year CFROI of 6.9%.

13 April 2012

US Coal Sector 17

(5) Target Price Reflects Historical Multiples: Assuming our $40 target price, CNX would be at 7.8x 2013 EBITDA, which is only a 3% discount to its historical EV/EBITDA multiple of 8.0x. As such, we believe upside is limited assuming historical multiples.

(6) Valuation: CNX is currently trading at 7.9x and 7.0x our 2012/13 EBITDA estimates, respectively. We are lowering our target price from $45 to $40, which reflects 7.8 our 2013 EBITDA estimate of $1.5b.

■ Where we Could be Wrong? 1) Nat gas prices start rising aggressively, 2) announcement of Buchanan restart sooner than expected, 3) positive Marcellus/Utica well results, potentially in next week’s production report (estimated).

Tables Exhibit 34: Operating Summary

Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % Chg. 2013E % Chg. 2014E % Chg.Coal SegmentProduction (million tons) 17.2 15.3 15.1 -12.2% -1.3% 62.6 56.6 -9.6% 58.2 2.8% 59.5 2.2%Sales (million tons) 16.7 15.3 14.6 -12.6% -4.6% 63.3 56.2 -11.2% 58.2 3.5% 59.5 2.2%Realized Price (US$/ton) $68.14 $71.92 $72.35 6.2% 0.6% $72.52 $71.03 -2.1% $73.96 4.1% $75.37 1.9%Operating Cost (US$/ton) $46.41 $54.72 $53.51 15.3% -2.2% $52.25 $53.73 2.8% $56.48 5.1% $58.32 3.2%Margins (US$/ton) $21.73 $17.20 $18.84 -13.3% 9.5% $20.27 $17.30 -14.6% $17.47 1.0% $17.05 -2.4%

Gas SegmentProduction (bcf) 35.9 39.7 37.1 3.3% -6.6% 153.5 159.9 4.2% 199.8 24.9% 252.0 26.1%Realized Price (US$/Mcf) $4.93 $4.68 $3.93 -20.3% -16.0% $4.90 $3.87 -21.1% $4.04 4.6% $4.46 10.4%Operating Cost (US$/Mcf) $3.77 $3.86 $3.91 3.7% 1.3% $3.86 $3.91 1.4% $3.75 -4.1% $3.55 -5.3%

Total Cap. Ex. ($ '000) $254,778 $384,908 $400,000 57.0% 3.9% $1,382,371 $1,500,000 8.5% $1,200,000 -20.0% $1,350,000 12.5%

Q1'12 vs.


Exhibit 35: Income Statement

Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % Chg. 2013E % Chg. 2014E % Chg.Sales - Outside 1,385,478 1,367,646 1,202,033 -13.2% -12.1% 5,660,813 4,610,976 -18.5% 5,111,944 10.9% 5,607,050 9.7%Sales - Related Parties 0 0 0 n.m. n.m. 0 0 n.m. 0 n.m. 0 n.m.Freight-Outside 36,868 75,225 36,061 -2.2% -52.1% 231,536 138,329 -40.3% 153,358 10.9% 168,211 9.7%Freight-Related Parties 0 0 0 n.m. n.m. 0 0 n.m. 0 n.m. 0 n.m.Purchased gas sales 980 1,047 2,250 n.m. n.m. 4,344 9,000 107.2% 9,200 2.2% 9,200 0.0%Other income 23,216 83,552 28,000 20.6% -66.5% 153,620 112,000 -27.1% 112,000 0.0% 112,000 0.0%Total Revenue 1,465,377 1,542,208 1,284,594 -12.3% -16.7% 6,117,242 4,935,306 -19.3% 5,450,503 10.4% 5,960,461 9.4% Gross Margin 41% 36% 38% -7.9% 6.8% 38% 37% -4.2% 37% 0.3% 38% 4.1%Cost of goods Sold 813,709 880,813 745,154 -8.4% -15.4% 3,501,189 2,925,467 -16.4% 3,238,366 10.7% 3,467,926 7.1%Freight Expense 36,679 75,225 36,061 -1.7% -52.1% 231,347 138,329 -40.2% 153,358 10.9% 168,211 9.7%Purchased gas costs 676 981 1,000 n.m. n.m. 3,831 4,000 4.4% 4,000 0.0% 4,000 0.0%SG&A 40,196 45,265 42,071 4.7% -7.1% 175,576 161,384 -8.1% 168,694 4.5% 173,819 3.0%DD&A 149,062 151,785 139,028 -6.7% -8.4% 618,397 558,656 -9.7% 629,440 12.7% 721,294 14.6%Interest expense 66,482 58,381 58,542 -11.9% 0.3% 248,344 234,168 -5.7% 234,168 0.0% 234,168 0.0%Taxes other than income 90,689 79,339 77,076 -15.0% -2.9% 344,460 296,118 -14.0% 294,327 -0.6% 298,023 1.3%non-recurring items 0 0 0 n.m. n.m. 146,814 0 n.m. 0 n.m. 0 n.m.Total costs 1,197,493 1,291,789 1,098,931 -8.2% -14.9% 5,269,958 4,318,122 -18.1% 4,722,353 9.4% 5,067,441 7.3%(EBT) 251,077 237,670 172,663 n.m. n.m. 787,953 565,184 -28.3% 676,150 19.6% 841,020 24.4%Income taxes 58,928 42,035 46,619 n.m. n.m. 155,456 152,600 -1.8% 182,560 19.6% 227,075 24.4%Minority Interest 0 0 0 n.m. n.m. 0 0 n/a 0 n/a 0 n/aNet Income (loss) 192,149 195,635 126,044 n.m. n.m. 632,497 412,584 -34.8% 493,589 19.6% 613,945 24.4%Reported EPS $0.84 $0.85 $0.55 n.m. -35.6% $2.76 $1.80 -34.8% $2.15 19.6% $2.68 24.4%Non-Recurring Items $0.00 $0.15 $0.00 n.m. n.m. -$0.27 $0.00 n.m. $0.00 n.m. $0.00 n.m.Operating EPS $0.84 $0.70 $0.55 n.m. n.m. $3.03 $1.80 -40.6% $2.15 19.6% $2.68 24.4%Avg. Shares Out. 228,815 229,314 229,314 0.2% 0.0% 229,108 229,314 0.1% 229,314 0.0% 229,314 0.0%Tax Rate 23.5% 17.7% 27.0% n.m. n.m. 19.7% 27.0% 36.9% 27.0% 0.0% 27.0% 0.0%EBIT 317,559 296,051 231,205 n.m. n.m. 1,036,297 799,351 -22.9% 910,317 13.9% 1,075,188 18.1%EBITDA 466,621 398,836 370,233 n.m. -7.2% 1,778,694 1,358,007 -23.7% 1,539,757 13.4% 1,796,482 16.7%

Q1'12 vs.


13 April 2012

US Coal Sector 18


Cloud Peak Energy (CLD)

No Signs of a Catalyst ■ We are downgrading the shares from Outperform to Neutral with a $17

target price. While we believe CLD is relatively better positioned than its coal producer peers to withstand the weak current thermal coal environment (given its high contracted position for 2012 and 2013), we see a lack of near-term catalysts as the primary reason for the Neutral rating.

■ EPS and TP Revisions: We are lowering our 2013 est from $1.98 to $1.66 and our 2014 estimate from $1.89 to $1.48. We are lowering our target price from $20 to $17, representing 4.2x our 2013 and 4.4x our 2014 EBITDA estimates.

■ What Gets us More Positive? 1) Nat gas prices above $4/mmbtu, 2) PRB production cuts, 3) Increasing Export Terminal Capacity, 4) CSAPR ruling.

Reasons for the Neutral Rating:

■ 1) Weak Thermal Coal Outlook: While CLD is relatively protected to weaker pricing (CLD is 100% sold in ’12, ~61% sold in ‘13), given the signficant rise in inventories and prolonged period of excess inventories/low natural gas prices expected, we believe prices will remain depressed through at least 2013.

■ 2) Limited Growth Profile: Relative to the other coal producers, CLD does not have significant growth in the pipeline at this time, and is unlikely to do so given its signficant lease/cash flow commitments.

■ 3) Limited Seaborne Export/Met Exposure: While CLD expects to export roughly 4.5m tons in 2012, its exposure to the stronger seaborne export markets is limited compared to its peers due to the lack of terminal infrastructure and rail on the west coast. This lack of export opportunities limits CLD’s ability to sell tons away from the weak US market. Additionally, given our more optimistic view on met coal prices (due to our positive view of steel production 2H’12), we prefer more met exposed names on a relative basis.

5) HOLT Valuation supports a Neutral Rating: Using Credit Suisse’s Holt Framework, CLD appears fully valued at current levels, with a warranted price of $15.59 based on a forecast CFROI of 4.26%.


14

19

24


Daily Apr 14, 2011 - Apr 12, 2012, 4/14/11 = US$20.64





Year 12/11A 12/12E 12/13E 12/14EEPS (CS adj.) (US$) 2.30 1.90 1.66 1.48Prev. EPS (US$) — — 1.98 1.89P/E (x) 6.7 8.1 9.3 10.4P/E rel. (%) 46.2 60.8 78.4 98.0Revenue (US$ m) 1,553.7 1,552.8 1,461.7 1,478.5EBITDA (US$ m) 351.8 320.3 293.1 278.9OCFPS (US$) 4.92 3.78 3.49 3.36P/OCF (x) 3.9 4.1 4.4 4.6EV/EBITDA (current) 3.5 3.8 4.2 4.4Net debt (US$ m) 294 276 278 288ROIC (%) 25.21 12.19 9.93 8.30

Number of shares (m) 60.92 IC (current, US$ m) 1,044.42BV/share (Next Qtr., US$) 13.0 EV/IC (x) 1.2Net debt (Next Qtr., US$ m) 291.2 Dividend (Next Qtr., US$) —Net debt/tot cap (Next Qtr., %) 37.4 Dividend yield (%) —


*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts


[email protected]


[email protected]

Rating (from Outperform) NEUTRAL* Price (12 Apr 12, US$) 15.41 Target price (US$) (from 20.00) 17.00¹ 52-week price range 24.02 - 14.93 Market cap. (US$ m) 938.81 Enterprise value (US$ m) 1,214.43

13 April 2012

US Coal Sector 19

Investment Thesis

Cloud Peak (CLD, NEUTRAL, TP $17) Reasons for the Neutral:

(7) Weak Thermal Coal Outlook: While CLD is relatively protected to weaker pricing (CLD is 100% priced and committed for 2012, ~61% priced and committed for 2013), given the signficant rise in inventories and limited production cutbacks so far, the combination of low nat gas prices and regulatory headwinds will likely keep prices at depressed levels through at least 2013. Even then, we do not expect meaningful improvement in PRB prices until new export terminal capacity gets built in the West, which is unlikely until 2015-2016 at the earliest.

(8) Limited Free Cash Flow Upside: Due to CLD’s significant leaseback agreement payments over the next 4 years (we estimate ~$391m from 2012 to 2015), CLD has virtually no positive free cash flow. Additionally, with 2013 and 2014 prices unlikely to recover to previous highs near-term, and minimal organic growth prospects, we do not see this issue improving until pricing improves.

Exhibit 36: CS Scenario Analysis – FCF Yields 2013/2014

Marginal Cost

Current Est.

Forward Curve

Marginal Cost

Current Est.

Forward Curve

Marginal Cost

Current Est.

Forward Curve

Marginal Cost

Current Est.

Forward Curve

BTU 680.6 849.2 962.8 945.0 1,301.3 1,485.6 9.2% 11.5% 13.0% 12.8% 17.6% 20.1%CLD (21.7) (2.2) (7.3) (125.2) (10.2) 10.1 -2.4% -0.2% -0.8% -13.8% -1.1% 1.1%CNX 60.9 (163.8) (1.9) 215.5 (17.6) 154.2 0.8% -2.1% 0.0% 2.8% -0.2% 2.0%ACI (147.6) (27.9) (40.3) (27.3) 8.8 224.3 -7.0% -1.3% -1.9% -1.3% 0.4% 10.6%ANR 388.7 211.7 452.7 97.4 306.2 578.8 12.4% 6.8% 14.5% 3.1% 9.8% 18.5%Avg 2.6% 2.9% 4.9% 0.7% 5.3% 10.5%

20132013 2014Free Cash Flow YieldFree Cash Flow

2014


(9) Limited Growth Profile: Relative to the other coal producers, CLD does not have significant growth plans in the pipeline at this time due to its commitment to increase its reserve life through reserve bids (a positive), as well its focus on the PRB region. We prefer Peabody Energy for its strong pipeline of Australian growth, with 30-40% production growth by 2016.

(10) Limited Seaborne Export/Met Exposure: While CLD expects to export roughly 4.5m tons in 2012, its exposure to the stronger seaborne export markets is relatively limited compared to its peers due to lack of terminal infrastructure and rail on the west coast. The lack of export opportunities limits CLD’s ability to sell tons away from the weak US market. Additionally, given our more optimistic view on met coal prices (due to our positive view of steel production 2H’12), we prefer more met exposed names on a relative basis.

(11) HOLT Valuation suggest a Neutral Rating: CFROI® is an approximation of the economic return, or an estimate of the average real internal rate of return earned by a firm on the portfolio of projects that constitute its operating assets. In the exhibit below, we look at the HOLT™ methodology to get a sense of whether a firm is creating economic wealth. Economic wealth is created if CFROI is greater than the discount rate (which is a measure of a firm’s real cost of capital).

Using Credit Suisse’s Holt Framework, Cloud Peak appears fully valued at current levels, with a warranted price of $15.59 based on a forecast CFROI of 4.26%. We believe this assumption is fair, given the current uncertainty around the long-term natural gas price, and the level at which coal prices will find a bottom relative to historical levels (average historical CFROI is 8.8%).

13 April 2012

US Coal Sector 20

Exhibit 37: CLD HOLT Relative Wealth Chart


■ Valuation: CLD is currently trading at 3.8x and 4.0x our 2013/14 EBITDA estimates, respectively. We are lowering our target price from $20 to $17, which reflects 4.2x our 2013 EBITDA estimate.

■ What Gets us Positive? 1) Nat gas prices above $4/mmbtu, 2) PRB production cuts, 3) Increasing West Export Terminal Capacity, 4) favorable CSAPR ruling.

Based on consensus estimates, HOLT assumes a warranted price of $15.59 for CLD, based on a forecast CFROI of 4.26%. While the historical median CFROI is 8.8%, 2011 CFROI was 5.9%, and we believe future growth rates will continue to decline.

13 April 2012

US Coal Sector 21


Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % chg. 2013E % chg. 2014E % chg.

Sales Volumes (million tons)

Antelope 9.1 9.9 9.0 na -9.5% 37.1 36.0 -2.8% 35.3 -2.0% 35.6 1.0%

Cordero Rojo 10.2 10.1 9.3 na -7.6% 39.4 37.3 -5.2% 36.6 -2.0% 36.9 1.0%

Spring Creek 3.9 5.2 4.2 na -18.6% 19.2 19.0 -1.1% 18.6 -2.0% 18.8 1.0%

Decker 0.3 0.5 0.3 na -36.6% 1.6 1.6 3.2% 1.6 -2.0% 1.6 1.0%

Other 0.3 0.0 0.5 na na 0.8 2.0 157.1% 2.0 -2.0% 0.0 -100.0%

Total Sales 23.7 25.7 23.3 -1.7% -9.2% 98.0 95.9 -2.1% 94.0 -2.0% 94.9 1.0%

Estimated average sales price per ton $12.73 $13.06 $13.27 4.3% 1.6% $12.91 $13.27 2.8% $13.25 -0.1% $13.30 0.3%

Estimated average Cost per ton* $8.94 $9.15 $9.67 8.2% 5.7% $9.12 $9.67 6.0% $9.91 2.4% $10.17 2.6%

Cash operating margin (US$/ton) $3.79 $3.91 $3.60 -5.1% -8.0% $3.79 $3.60 -5.1% $3.34 -7.0% $3.13 -6.5%

% chg. versus



Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % chg. 2013E % chg. 2014E % chg.

Revenues 356,545 402,487 379,236 6.4% -5.8% 1,553,661 1,552,777 -0.1% 1,461,724 -5.9% 1,478,460 1.1%

Total Revenue 356,545 402,487 379,236 6.4% -5.8% 1,553,661 1,552,777 -0.1% 1,461,724 -5.9% 1,478,460 1.1%

Costs and Expenses:

Cost of product sold 261,181 295,566 288,410 10.4% -2.4% 1,151,117 1,179,761 2.5% 1,119,445 -5.1% 1,149,594 2.7%

D&D 25,115 28,590 24,465 -2.6% -14.4% 87,127 100,695 15.6% 96,801 -3.9% 98,719 2.0%

Amortization 0 0 0 n/m n/m 0 0 na 0 na 0 na

Accretion 3,340 3,049 2,796 -16.3% -8.3% 12,469 11,508 -7.7% 11,278 -2.0% 12,340 9.4%

Exploration Costs 0 0 0 n/m n/m 0 0 na 0 na 0 na

SG&A 13,027 13,575 13,463 3.3% -0.8% 52,480 55,124 5.0% 52,622 -4.5% 53,225 1.1%

Asset impairment 0 0 0 n/m n/m 0 0 na 0 na 0 na

Other 0 0 0 na na 0 0 na 0 na 0 na

Total Expenses 302,663 340,780 329,134 8.7% -3.4% 1,303,193 1,347,088 3.4% 1,280,146 -5.0% 1,313,877 2.6%

Income from Ops 53,882 61,707 50,102 -7.0% -18.8% 250,468 205,689 -17.9% 181,578 -11.7% 164,583 -9.4%

Interest Income 135 133 133 -1.5% 0.0% 592 532 -10.1% 532 0.0% 532 0.0%

Interest Expense (12,218) (6,346) (7,500) n/m n/m (33,866) (30,000) -11.4% (30,000) 0.0% (30,000) 0.0%

Other, net 162 2,140 0 n/m n/m (17,749) 0 -100.0% 0 #DIV/0! 0 #DIV/0!

Earnings before taxes 41,961 57,634 42,735 1.8% -25.9% 199,445 176,221 -11.6% 152,110 -13.7% 135,115 -11.2%

Income tax expense (15,293) (13,474) (15,384) 0.6% 14.2% (11,449) (63,440) 454.1% (54,759) -13.7% (48,641) -11.2%

Earnings of unconsol. Affil. 105 (341) 456 na na 1,801 2,432 na 3,408 na 3,219 na

MI, net of tax 0 0 0 na na 0 0 na 0 na 0 na

Net Income 26,773 43,819 27,806 n.m. n.m. 189,797 115,214 -39.3% 100,758 -12.5% 89,693 -11.0%

Earnings Per Share:

Reported Basic $0.45 $0.73 $0.46 3.8% -36.5% $3.16 $1.92 -39.3% $1.68 -12.5% $1.49 -11.0%

Reported Diluted $0.44 $0.72 $0.46 3.7% -36.5% $3.13 $1.90 -39.4% $1.66 -12.5% $1.48 -11.0%

$0.00 $0.02 $0.00 na na $0.83 $0.00 na $0.00 na $0.00 na

Operating - Basic $0.45 $0.71 $0.46 3.8% -34.8% $2.33 $1.92 -17.7% $1.68 -12.5% $1.49 -11.0%

Operating - Diluted $0.44 $0.70 $0.46 3.7% -34.7% $2.30 $1.90 -17.5% $1.66 -12.5% $1.48 -11.0%

Shares Outstanding

Basic 60,000 60,007 60,007 0.0% 0.0% 60,004 60,007 0.0% 60,007 0.0% 60,007 0.0%

Diluted 60,663 60,741 60,741 0.1% 0.0% 60,662 60,741 0.1% 60,741 0.0% 60,741 0.0%

EBIT 53,882 61,707 50,102 -7.0% -18.8% 250,468 205,689 -17.9% 181,578 -11.7% 164,583 -9.4%

EBITDA 82,604 92,945 77,819 -5.8% -16.3% 351,766 320,324 -8.9% 293,065 -8.5% 278,861 -4.8%

% chg. vs.


13 April 2012

US Coal Sector 22


Peabody Energy Corp (BTU)

The Pacific Basin Play ■ In conjunction with the Credit Suisse Global Metals & Mining team’s coal

price revisions, we are lowering our estimates and Target Price for Peabody Energy. We maintain our Outperform rating on the shares. BTU remains our top pick within the US coal space.

■ EPS and TP Revisions - We are lowering our 2012 estimate from $3.48 to $3.07, our 2013 estimate from $5.50 to $4.31 and our 2014 estimate from $6.33 to $5.17. We are lowering our target price from $48 to $44, which represents 6.2x and 5.5x our 2013 and 2014 EBITDA estimates.

Reasons for the Outperform:

■ 1) Attractive Australian Asset Base Provides Direct Exposure to the Most Attractive Markets – Global Thermal and Met: BTU remains the preferred global coal play, with the company’s Australian assets currently comprising 60% of EBITDA today, but approximately 75% of EBITDA by 2015. Additionally, the drivers of earnings in Australia remains China and India, which continue to build out coal-fired capacity, contrary to the continued secular decline in the U.S.

■ 2) Volume and Earnings Growth to 2015: We believe BTU’s significant growth profile in Australia remains underappreciated by investors that continue to focus on near-term headwinds. With 30-40% production growth targeted by 2015 not including the potential Macarthur Coal projects, we believe this earnings growth will be rewarded by investors as the company continues to execute.

■ 3) Option on PRB: In addition to the strong Pacific Basin story, BTU still has the largest reserve and production base in the PRB. We believe the PRB is the one basin in the United States that has the cost position, the product composition (low sulfur, low BTU content but cheap) and the regulatory conditions (CSAPR) to compete with natural gas over time.


27

47

67


Daily Apr 13, 2011 - Apr 12, 2012, 4/13/11 = US$65.18





Year 12/11A 12/12E 12/13E 12/14EEPS (CS adj.) (US$) 4.08 3.07 4.31 5.17Prev. EPS (US$) — 3.48 5.50 6.33P/E (x) 7.2 9.5 6.8 5.7P/E rel. (%) 49.6 71.5 57.5 53.3Revenue (US$ m) 8,042.4 9,035.4 9,820.8 10,786.4EBITDA (US$ m) 2,207.0 2,393.4 2,868.7 3,213.8OCFPS (US$) 5.71 5.76 7.17 8.13P/OCF (x) 5.8 5.1 4.1 3.6EV/EBITDA (current) 6.3 5.8 4.8 4.3Net debt (US$ m) 5,858 5,693 4,806 3,461ROIC (%) 14.95 10.32 12.86 14.70



*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts


[email protected]


[email protected]

Rating OUTPERFORM* [V] Price (12 Apr 12, US$) 29.34 Target price (US$) (from 48.00) 44.00¹ 52-week price range 66.82 - 27.30 Market cap. (US$ m) 7,987.97 Enterprise value (US$ m) 13,681.36

13 April 2012

US Coal Sector 23

Investment Thesis Reasons for the Outperform:

(12) Attractive Australian Asset Base Provides Direct Exposure to the Most Attractive Markets – Global Thermal and Met: BTU remains our preferred global coal play, with the company’s Australian assets currently comprising 60% of EBITDA today, but approximately 75% of EBITDA by 2015. Additionally, the drivers of earnings in Australia remain China and India which continue to build out coal-fired capacity, contrary to the continued secular decline in the U.S.

Exhibit 40: US & Australia EBITDA % of Total 2011 Exhibit 41: US & Australia EBITDA % of Total 2015E

50.0%

50.0%

US

Australia

34.6%

65.4%

US

Australia

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

(13) Volume and Earnings Growth to 2015: We believe BTU’s significant growth profile in Australia remains underappreciated by investors that continue to focus on near-term headwinds. With 30-40% production growth targeted by 2015 not included the potential Macarthur Coal projects, we believe this earnings growth will be rewarded by investors as the company continues to execute.

Exhibit 42: Australian Segment EBITDA 2011-2015E Exhibit 43: Australian Coal Volumes 2011-2015E

0

500

1000

1500

2000

2500

3000

2011 2012 2013 2014 2015

Australia

0

5

10

15

20

25

30

35

40

45

50

2011 2012 2013 2014 2015

Australia

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

(14) Free Option on PRB Story: In addition to the strong Pacific Basin story, BTU still has the largest reserve and production base in the PRB. We believe the PRB is the one basin in the United States that has the cost position and the product composition (low sulfur, low BTU content but cheap) to compete with natural gas over time.

(15) Holt Valuation Supports an Outperform Rating: CFROI® is an approximation of the economic return, or an estimate of the average real internal rate of return earned by a firm on the portfolio of projects that constitute its operating assets. In the exhibit below, we look at the HOLT™ methodology to get a sense of whether a firm is creating economic wealth. Economic wealth is created if CFROI is greater than the discount rate (which is a measure of a firm’s real cost of capital).

13 April 2012

US Coal Sector 24

Using Credit Suisse’s Holt Framework, Peabody Energy appears attractive at current levels, with a warranted price of $34.04 based on a forecast CFROI of 7.72%. We believe this assumption is probably conservative, given the company’s history of consistently generating returns above its cost of capital (average CFROI for most recent 5 years was 9.45%). We also believe HOLT does not factor in the potential longer-term accretive impact from higher met and thermal coal prices, as well as the significant volume growth from organic projects and the synergies from the Macarthur acquisition.

Exhibit 44: BTU HOLT Relative Wealth Chart


■ Valuation: Shares of BTU are trading at y.yx and y.yx our 2013/14 EBITDA estimates, respectively. We are lowering our target price from $48 to $44, which reflects 6.2x our 2013 EBITDA estimate.

Based on consensus estimates, HOLT assumes a warranted price of $34.04 for BTU, based on a forecast CFROI of 7.72%. We feel this assumption is conservative, given the company’s historical CFROI of 9.45% and expect actual CFROI to be above the CFROI forecast, given our more bullish view on met coal prices longer-term.

13 April 2012

US Coal Sector 25


Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % chg. 2013E % chg. 2014E % chg.Tons sold (in millions) Midwestern 7.6 8.0 6.5 -14.5% -18.8% 30.3 30.0 -1.0% 29.1 -3.0% 29.1 0.0% West 43.8 46.4 40.0 -8.7% -13.8% 173.6 165.0 -5.0% 161.7 -2.0% 163.3 1.0% Australia 5.6 7.1 6.8 21.4% -4.2% 26.2 32.5 23.9% 36.0 10.9% 42.5 18.1% Trading 4.2 7.0 6.0 42.9% -14.3% 21.4 24.0 12.1% 24.0 0.0% 20.0 -16.7%Total tons sold 61.2 68.5 59.3 -3.1% -13.4% 251.5 251.5 0.0% 250.8 -0.3% 254.9 1.6%Revenues per ton Midwestern $48.36 $50.98 $50.00 3.4% -1.9% $49.10 $50.00 1.8% $46.00 -8.0% $45.00 -2.2% West $16.07 $16.73 $17.03 6.0% 1.8% $16.72 $17.03 1.9% $18.62 9.4% $19.03 2.2% Australia $102.94 $125.52 $132.13 28.4% 5.3% $118.78 $129.25 8.8% $137.21 6.2% $139.59 1.7%Wtd. Avg total revenues/ton $28.91 $33.74 $35.74 23.6% 5.9% $32.60 $37.39 14.7% $40.96 9.5% $44.06 7.6%Operating costs per ton Midwestern $33.88 $36.63 $37.11 9.5% 1.3% $35.54 $36.41 2.4% $38.32 5.2% $39.32 2.6% West $11.97 $11.69 $12.60 5.3% 7.8% $12.17 $12.32 1.2% $12.84 4.2% $13.09 2.0%Average - U.S. operations $15.21 $15.30 $16.03 5.4% 4.8% $15.64 $16.03 2.5% $16.72 4.3% $17.06 2.0% Australia $69.16 $70.59 $82.65 19.5% 17.1% $72.99 $79.11 8.4% $77.89 -1.5% $80.48 3.3%Average cost per ton $20.51 $21.73 $24.53 19.6% 12.9% $22.17 $25.03 12.9% $26.43 5.6% $28.53 7.9%Margins per ton Midwestern $14.48 $14.35 $12.89 -11.0% -10.2% $13.56 $13.59 0.2% $7.68 -43.5% $5.68 -26.0% West $4.10 $5.04 $4.43 7.9% -12.2% $4.55 $4.71 3.6% $5.79 22.9% $5.94 2.7%Average - U.S. operations $5.63 $6.39 $5.61 -0.4% -12.2% $5.89 $6.08 3.2% $6.08 0.0% $5.90 -2.8% Australia $33.78 $54.93 $49.48 n/a n/a $45.79 $50.15 9.5% $59.31 18.3% $59.11 -0.3%Average margin per ton $8.40 $12.01 $11.21 33.4% -6.7% $10.43 $12.36 18.5% $14.53 17.5% $15.53 6.9%Coal revenues by segment Midwestern $368 $408 $325 -11.6% -20.3% $1,488 $1,500 0.8% $1,339 -10.8% $1,310 -2.2% West $704 $776 $681 -3.2% -12.2% $2,902 $2,810 -3.2% $3,012 7.2% $3,108 3.2% Australia $576 $891 $898 n/a n/a $3,112 $4,194 34.8% $4,939 17.8% $5,932 20.1% Implied Trading and other $97 $178 ($389) -501.0% -318.2% $540 $531 -1.7% $531 0.0% $436 -17.9%Total revenues $1,745 $2,254 $1,516 -13.1% -32.7% $8,042 $9,035 12.3% $9,821 8.7% $10,786 9.8%Operating costs by segment Midwestern $257 $293 $241 -6.3% -17.7% $1,077 $1,092 1.4% $1,115 2.1% $1,144 2.6% West $524 $542 $504 -3.8% -7.0% $2,113 $2,033 -3.8% $2,076 2.1% $2,138 3.0% Australia $85 $109 $109 28.0% 0.3% $1,912 $2,567 34.2% $2,804 9.2% $3,420 22.0% Implied Trading and other $486 $704 $708 45.7% 0.6% $557 $586 5.0% $586 0.0% $488 -16.7%Total operating costs $1,268 $1,540 $1,454 14.6% -5.6% $5,660 $6,278 10.9% $6,581 4.8% $7,190 9.3%

% Chg vs.


13 April 2012

US Coal Sector 26


Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % Chg. 2013E % Chg. 2014E % Chg.

Coal and trading sales 1,735 2,248 2,029 17.0% -9.7% 8,005 9,003 12.5% 9,789 8.7% 10,766 10.0%Other 10 6 8 n.m. 45.5% 37 32 -13.5% 32 0.0% 20 -37.5% Total Revenue 1,745 2,254 2,037 16.8% -9.6% 8,042 9,035 12.3% 9,821 8.7% 10,786 9.8%Costs and Expenses: Operating costs & expenses 1,268 1,540 1,454 14.6% -5.6% 5,660 6,278 10.9% 6,581 4.8% 7,190 9.3% DD&A 109 160 181 66.6% 13.6% 487 726 49.0% 714 -1.6% 740 3.6% SG&A 62 86 91 47.8% 6.0% 277 364 31.3% 372 2.0% 383 3.0% Total Expenses 1,439 1,785 1,726 20.0% -3.3% 6,424 7,368 14.7% 7,667 4.0% 8,313 8.4%Net Gain on ppty. Disp.+_Asset retirement obl. 12 50 17 n.m. n.m. 72 62 n.m. 60 n.m. 60 n.m.Operating Profit 294 418 294 0.0% -29.6% 1,547 1,605 3.8% 2,094 30.5% 2,414 15.3%Interest Expense 51 80 107 108.8% 34.0% 239 426 78.4% 426 0.0% 426 0.0%Interest Income (4) (7) (2) -51.2% -72.2% (19) (8) -57.7% (8) 0.0% (8) 0.0% Net interest expense 47 72 105 122.8% 44.6% 220 418 90.1% 418 0.0% 418 0.0%Earnings before taxes 247 346 190 -23.2% -45.1% 1,327 1,187 -10.5% 1,676 41.2% 1,996 19.1%Income Tax provision (benefit) 68 108 52 -23.0% -51.4% 317 330 4.3% 471 42.7% 559 18.5%Minority Interests 2 (28) 5 127.3% -117.6% (11) 26 -328.1% 40 53.8% 40 0.0%Income From Continuing Operations 177 267 133 -25.2% -50.3% 1,021 831 -18.7% 1,165 40.2% 1,397 19.9% Discontinued Operations/Chg. In Acct. Prin. 0 (29) 0 n.m. n.m. 0 0 n.m. 0 n.m. 0 n.m. (income) loss from dis. operations 1 0 0 n.m. n.m. 4 0 n.m. 0 n.m. 0 n.m. Loss (gain) from disposal of dis. operations 0 16 0 n.m. n.m. 31 0 n.m. 0 n.m. 0 n.m.Net Income 177 222 133 -24.8% -40.3% 986 831 -15.8% 1,165 40.2% 1,397 19.9%Earnings Per Share:Reported Basic $0.65 $0.82 $0.49 -24.1% -40.3% $3.64 $3.07 -15.5% $4.31 40.2% $5.17 19.9%Reported Diluted $0.65 $0.82 $0.49 -24.1% -40.3% $3.64 $3.07 -15.5% $4.31 40.2% $5.17 19.9%Non-recurring items, Diluted -$0.02 -$0.50 $0.00 n.m. n.m. -$0.44 $0.00 n.m. $0.00 n.m. $0.00 n.m.Operating - Basic $0.67 $1.32 $0.49 -26.4% -62.9% $4.08 $3.07 -24.7% $4.31 40.2% $5.17 19.9%Operating - Diluted $0.67 $1.32 $0.49 -26.4% -62.9% $4.08 $3.07 -24.7% $4.31 40.2% $5.17 19.9%Diluted Shares Outstanding 272.8 270.3 270.3 -0.9% 0.0% 271.1 270.3 -0.3% 270.3 0.0% 270.3 0.0%Income Tax Rate 27% 31% 28% nm nm 24% 28% 28% 28%

EBT $247 $346 $190 -23.2% -45.1% 1,327 1,187 -10.5% 1,676 41.2% 1,996 19.1%EBIT $294 $418 $294 0.0% -29.6% 1,547 1,605 3.8% 2,094 30.5% 2,414 15.3%EBITDA $416 $673 $493 18.4% -26.8% 2,207 2,393 8.4% 2,869 19.9% 3,214 12.0%

% Chg vs.


13 April 2012

US Coal Sector 27


Alpha Natural Resources (ANR)

Adjusting for Lower Coal Prices ■ In conjunction with the Credit Suisse Global Metals & Mining team’s

coal price revisions, we are lowering our estimates and Target Price for Alpha Natural Resources. We maintain our Neutral rating on the shares.

■ EPS and TP Revisions - We are lowering our 2012 estimate from $0.32 to a loss of $0.11, our 2013 estimate from $0.88 to a loss of $0.01 and our 2014 estimate from $1.05 to $0.11. We are lowering our target price from $22 to $18, which represents 5.8x and 5.3x our 2013 and 2014 EBITDA estimates.

■ CS Global Seaborne Coking Coal Price Forecast: We are lowering our forecasts for US met coal prices in conjunction with our global met coal price revisions, accounting for differences in quality and contracted tonnage within the models. For global benchmarks, we are lowering our 2012 forecast from $234/tonne to $226/tonne, while our 2013 forecast of $239/tonne remains unchanged.

■ CAPP/NAPP Price Forecast – Our 2012 forecast of $62/ton remains unchanged, while we are lowering our 2013 forecast from $70/ton to $60/ton.

■ PRB Coal Price Forecast - Our 2012 forecast remains unchanged at $10/ton (ANR is completely sold-out for 2012). We are lowering our 2013 forecast from $13/ton to $12/ton. Our long-term PRB price of $14/ton remains unchanged.

■ ANR will likely report Q1’12 results sometime in early-May.


14

34

54


Daily Apr 13, 2011 - Apr 12, 2012, 4/13/11 = US$53.89



Quarterly EPS Q1 Q2 Q3 Q4 2011A 0.65 0.96 0.35 -0.07 2012E -0.02 -0.15 -0.12 0.17 2013E 0.10 0.10 -0.20 -0.01


Year 12/11A 12/12E 12/13E 12/14EEPS (CS adj.) (US$) 1.88 -0.11 -0.01 0.11Prev. EPS (US$) — 0.32 0.88 1.05P/E (x) 8.5 -142.1 -1,933.1 144.5P/E rel. (%) 58.9 -1,063.3 -16,312.9 1,357.3Revenue (US$ m) 7,099.6 7,376.0 7,426.9 7,767.9EBITDA (US$ m) 1,212.7 1,037.9 1,086.0 1,183.3OCFPS (US$) 10.09 3.94 4.16 4.59P/OCF (x) 2.0 4.1 3.9 3.5EV/EBITDA (current) 4.9 5.7 5.5 5.0Net debt (US$ m) 2,382 2,167 1,956 1,650ROIC (%) 20.55 1.45 1.73 1.97

Number of shares (m) 220.26 IC (current, US$ m) 9,810.40BV/share (Next Qtr., US$) 33.9 EV/IC (x) 0.60Net debt (Next Qtr., US$ m) 2,318.5 Dividend (Next Qtr., US$) —Net debt/tot cap (Next Qtr., %) 31.2 Dividend yield (%) —



Research Analysts


[email protected]


[email protected]

Rating NEUTRAL* [V] Price (12 Apr 12, US$) 16.08 Target price (US$) (from 22.00) 18.00¹ 52-week price range 58.17 - 14.06 Market cap. (US$ m) 3,541.71 Enterprise value (US$ m) 5,709.15

13 April 2012

US Coal Sector 28


Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % chg. 2013E % chg. 2014E % chg.Tons sold (in millions)West 13.4 12.6 13.9 4.0% 10.7% 49.9 47.0 -5.9% 46.1 -1.9% 46.6 1.1%Eastern Steam 5.8 12.7 11.9 106.6% -6.2% 37.2 41.5 11.6% 39.5 -4.8% 39.9 1.0%Eastern Met 3.0 5.9 5.3 77.5% -10.3% 19.2 21.2 10.5% 24.5 15.6% 26.5 8.2%Total tons sold 22.1 31.2 31.1 40.7% -0.2% 106.3 109.7 3.2% 110.1 0.4% 113.0 2.6%Revenue per tonWest $10.94 $11.98 $11.96 9.3% -0.2% $11.94 $12.78 7.0% $12.60 -1.4% $13.20 4.8%Eastern Steam $67.04 $67.07 $66.93 -0.2% -0.2% $66.91 $67.77 1.3% $61.64 -9.0% $65.00 5.5%Eastern Met $114.87 $168.49 $156.48 36.2% -7.1% $161.86 $137.76 -14.9% $137.40 -0.3% $132.00 -3.9%Wtd Avg $39.61 $64.08 $57.62 45.5% -10.1% $58.22 $57.73 -0.8% $57.96 0.4% $59.35 2.4%Cost per TonWest $7.87 $10.34 $9.44 19.9% -8.7% $9.99 $11.09 11.0% $11.14 0.4% $11.35 1.9%Eastern (wtd avg) 64.18 75.81 $78.49 22.3% 3.5% $74.89 $74.92 0.0% $74.04 -1.2% $74.66 0.8%Wtd Avg $30.17 $49.44 $47.67 58.0% -3.6% $44.40 $47.57 7.1% $47.70 0.3% $48.55 1.8%Margins per TonWest $3.07 $1.64 $2.52 -17.9% 53.7% $1.95 $1.69 -13.4% $1.46 -13.4% $1.85 26.6%Eastern (wtd avg) 19.15 23.39 $15.95 -16.7% -31.8% $24.33 $16.51 -32.1% $16.60 0.5% $17.08 2.9%Total (wtd avg) $9.44 $14.63 $9.96 5.5% -32.0% $13.82 $10.16 -26.4% $10.26 1.0% $10.80 5.3%

% Chg vs.



Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % chg. 2013E % chg. Coal Revenues 876,042 1,997,934 1,793,630 204.7% -10.2% 6,189,434 6,333,439 2.3% 6,381,937 0.8% Freight and Handling Revenues 92,173 213,834 181,478 na -15.1% 662,238 725,912 9.6% 725,912 0.0% Other Revenues 24,900 93,010 95,535 na 2.7% 247,925 316,672 27.7% 319,097 0.8%Total Revenues 993,115 2,304,778 2,070,643 208.5% -10.2% 7,099,597 7,376,023 3.9% 7,426,945 0.7%

Cost of Coal Sold 669,836 1,675,209 1,553,897 150.1% -7.2% 5,070,754 5,218,492 2.9% 5,251,902 0.6% (Increase) decrease in FV of contracts - - - - - - Freight & Handling 92,173 213,834 181,478 132.0% -15.1% 662,238 725,912 9.6% 725,912 0.0% Cost of other Revenues 29,404 58,063 34,268 97.5% -41.0% 156,281 174,170 11.4% 175,503 0.8% DD&A 90,667 242,699 285,452 167.7% 17.6% 760,558 1,069,575 40.6% 1,073,475 0.4% SG&A 45,371 72,701 49,411 60.2% -32.0% 379,067 217,597 -42.6% 185,674 -14.7% Amort. of Coal Supply Agreements 52,805 (73,274) (50,537) -238.8% -31.0% (107,434) (180,000) (160,000) Other - - 745,325 - - - Total costs and expenses 980,256 2,189,232 2,799,294 123.3% 27.9% 7,666,789 7,225,746 -5.8% 7,252,466 0.4%Operating Income 12,859 115,546 (728,651) 798.6% -730.6% (567,192) 150,276 -126.5% 174,480 16.1%

Interest Expense (15,005) (49,148) (47,188) 227.5% -4.0% (141,805) (180,000) 26.9% (180,000) 0.0%Interest Income 963 931 991 -3.3% 6.4% 3,979 5,600 40.7% 5,600 0.0%Miscellaneous Income (1,604) (4,903) 44 205.7% -100.9% (9,391) (2,000) -78.7% (2,000) 0.0%Total Other Income (Expense) (15,646) (53,120) (46,153) 239.5% -13.1% (147,217) (176,400) 19.8% (176,400) 0.0%Income Before Taxes (2,787) 62,426 (774,804) na na (714,409) (26,124) -96.3% (1,920) -92.7%

Income Tax Expense (13,792) (4,002) (41,470) -71.0% 936.2% (40,999) (1,306) -96.8% (96) -92.7%Minority Interest 166 - - - - - Net Income 10,839 66,428 (733,334) 512.9% -1204.0% (673,410) (24,817) -96.3% (1,824) -92.7%

Earnings Per Share $0.09 $0.29 ($3.34) 229.7% na (3.01)$ ($0.11) -96.2% ($0.01) -92.7%Non Recurring Items $0.18 $0.06 $3.27 -66.7% na 4.89$ $0.00 $0.00Basic $0.27 $0.36 ($0.07) 31.6% -120.9% 1.89$ ($0.11) -106.0% ($0.01) -92.7%Diluted $0.27 $0.35 ($0.07) 31.4% -121.0% 1.88$ ($0.11) -106.0% ($0.01) -92.7%

Basic Shares 119,649 224,394 219,280 87.5% -2.3% 179,732 219,280 22.0% 219,280 0.0%Diluted Shares 121,731 226,282 219,280 85.9% -3.1% 180,709 219,280 21.3% 219,280 0.0%Effective income tax rate 494.9% -6.4% 5.4% 5.7% 5.0% 5.0%

EBIT 11,255 110,643 (728,607) na na (576,583) 148,276 -125.7% 172,480 16.3%EBITDA 163,428 373,118 261,308 128.3% -30.0% 1,212,341 1,037,851 -14.4% 1,085,955 4.6%Reported adjusted EBITDA 163,428 373,050 260,820 128.3% -30.1% 183,975 1,037,851 464.1% 1,085,955 4.6%

% Chg vs.


13 April 2012

US Coal Sector 29


Arch Coal, Inc. (ACI)

Adjusting for Lower Coal Prices ■ In conjunction with the Credit Suisse Global Metals & Mining team’s

coal price revisions, we are lowering our estimates and Target Price for Arch Coal. We maintain our Neutral rating on the shares.

■ EPS and TP Revisions - We are lowering our 2012 estimate from $0.89 to $0.59, our 2013 estimate from $1.31 to $0.83 and our 2014 estimate from $1.84 to $0.99. We are lowering our target price from $14 to $12, which represents 6.5x our 2013 EBITDA estimate and 6.1x our 2014 EBITDA estimate.

■ CS Global Seaborne Coking Coal Price Forecast: We are lowering our forecasts for US met coal prices in conjunction with our global met coal price revisions, accounting for differences in quality and contracted tonnage within the models. For global benchmarks, we are lowering our 2012 forecast from $234/tonne to $226/tonne, while our 2013 forecast of $239/tonne remains unchanged.

■ CAPP/NAPP Price Forecast – Our 2012 forecast of $62/ton remains unchanged, while we are lowering our 2013 forecast from $70/ton to $60/ton.

■ PRB Coal Price Forecast - Our 2012 forecast remains unchanged at $10/ton. We are lowering our 2013 forecast from $13/ton to $12/ton. Our long-term PRB price of $14/ton remains unchanged.

■ ACI will likely report Q1’12 results sometime in late-April.


9

19

29


Daily Apr 14, 2011 - Apr 12, 2012, 4/14/11 = US$33.35





Year 12/11A 12/12E 12/13E 12/14EEPS (CS adj.) (US$) 1.16 0.59 0.83 0.99Prev. EPS (US$) — 0.89 1.31 1.84P/E (x) 9.2 18.0 12.8 10.7P/E rel. (%) 63.3 134.8 107.9 100.8Revenue (US$ m) 4,285.5 3,922.9 3,937.1 4,152.8EBITDA (US$ m) 921.7 933.6 991.1 1,059.4OCFPS (US$) 7.58 3.15 3.38 3.56P/OCF (x) 1.9 3.4 3.1 3.0EV/EBITDA (current) 6.7 6.6 6.2 5.8Net debt (US$ m) 3,905 3,792 3,819 3,098ROIC (%) 8.75 6.07 6.32 6.41




Research Analysts


[email protected]


[email protected]

Rating NEUTRAL* [V] Price (12 Apr 12, US$) 10.63 Target price (US$) (from 14.00) 12.00¹ 52-week price range 34.64 - 9.91 Market cap. (US$ m) 2,254.37 Enterprise value (US$ m) 6,045.92

13 April 2012

US Coal Sector 30


Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % Chg. 2013E % Chg. 2014ERevenue Per Ton (US$'s)

Central App. 71.91 86.50 86.12 19.8% -0.4% 87.12 92.02 5.6% 100.55 9.3% 106.12 PRB 12.51 13.62 13.65 9.1% 0.2% 13.62 13.83 1.5% 13.21 -4.5% 13.20 Western Bituminous 28.79 36.09 36.40 26.4% 0.9% 34.96 38.31 9.6% 38.37 0.1% 40.00

Total 18.66 27.70 25.94 39.0% -6.4% 25.14 26.80 6.6% 27.09 1.1% 28.34 Cost Per Ton (US$'s)

Central App. 57.78 76.62 76.66 32.7% 0.1% 73.01 76.78 5.2% 77.05 0.3% 79.69 PRB 10.92 12.16 11.69 7.1% -3.9% 11.95 12.68 6.2% 12.68 0.0% 12.85 Western Bituminous 24.79 30.29 30.21 21.9% -0.3% 28.00 32.28 15.3% 33.45 3.6% 34.11

Total 15.88 24.43 22.54 41.9% -7.8% 21.33 23.27 9.1% 23.12 -0.6% 23.93 Margins Per Ton (US$'s)

Central App. 14.13 9.88 9.46 n.m. -4.3% 14.12 15.24 8.0% 23.50 54.2% 26.42 PRB 1.59 1.46 1.96 n.m. 34.2% 1.68 1.14 -31.8% 0.52 -54.1% 0.35 Western Bituminous 4.00 5.80 6.19 n.m. 6.7% 6.96 6.03 -13.3% 4.92 -18.5% 5.89

Total 2.79 3.27 3.41 22.2% 4.1% 3.81 3.53 -7.4% 3.97 12.4% 4.41 Sales Volumes (k tons)

Central App. 3,200 6,300 5,900 84.4% -6.3% 19,200 19,900 3.6% 19,150 -3.8% 19,750 PRB 34,600 28,800 32,200 -6.9% 11.8% 117,800 112,500 -4.5% 112,500 0.0% 112,500 Western Bituminous 4,200 4,200 3,900 -7.1% -7.1% 17,000 14,000 -17.6% 13,700 -2.1% 14,300

Total 42,000 39,300 42,000 0.0% 6.9% 154,000 146,400 -4.9% 145,350 -0.7% 146,550 Implied Total:Revenues (k US$'s)

Central App. 230,112 544,950 508,108 120.8% -6.8% 1,672,736 1,831,144 9.5% 1,925,462 5.2% 2,095,806 PRB 432,846 392,256 439,530 1.5% 12.1% 1,604,474 1,555,320 -3.1% 1,486,026 -4.5% 1,485,000 Western Bituminous 120,918 151,578 141,960 17.4% -6.3% 594,245 536,393 -9.7% 525,615 -2.0% 572,000

Total 783,876 1,088,784 1,089,598 39.0% 0.1% 3,871,455 3,922,857 1.3% 3,937,103 0.4% 4,152,806

Costs (k US$'s)Central App. 184,896 482,706 452,294 144.6% -6.3% 1,401,712 1,527,888 9.0% 1,475,428 -3.4% 1,573,968 PRB 377,832 350,208 376,418 -0.4% 7.5% 1,407,154 1,426,716 1.4% 1,427,017 0.0% 1,445,256 Western Bituminous 104,118 127,218 117,819 13.2% -7.4% 475,980 451,947 -5.0% 458,264 1.4% 487,837

Total 666,846 960,132 946,531 41.9% -1.4% 3,284,846 3,406,551 3.7% 3,360,708 -1.3% 3,507,062

Margin (k US$'s)Central App. 45,216 62,244 55,814 n.m. -10.3% 271,024 303,256 11.9% 450,034 48.4% 521,837 PRB 55,014 42,048 63,112 n.m. 50.1% 197,320 128,604 -34.8% 59,009 -54.1% 39,744 Western Bituminous 16,800 24,360 24,141 n.m. -0.9% 118,265 84,446 -28.6% 67,351 -20.2% 84,163

Total 117,030 128,652 143,067 22.2% 11.2% 586,609 516,306 -12.0% 576,395 11.6% 645,744

% chg vs.



Q1'11 Q4'11 Q1'12E Q1'11 Q4'11 2011 2012E % Chg. 2013E % Chg. 2014ERevenue Per Ton (US$'s)

Central App. 71.91 86.50 86.12 19.8% -0.4% 87.12 92.02 5.6% 100.55 9.3% 106.12 PRB 12.51 13.62 13.65 9.1% 0.2% 13.62 13.83 1.5% 13.21 -4.5% 13.20 Western Bituminous 28.79 36.09 36.40 26.4% 0.9% 34.96 38.31 9.6% 38.37 0.1% 40.00

Total 18.66 27.70 25.94 39.0% -6.4% 25.14 26.80 6.6% 27.09 1.1% 28.34 Cost Per Ton (US$'s)

Central App. 57.78 76.62 76.66 32.7% 0.1% 73.01 76.78 5.2% 77.05 0.3% 79.69 PRB 10.92 12.16 11.69 7.1% -3.9% 11.95 12.68 6.2% 12.68 0.0% 12.85 Western Bituminous 24.79 30.29 30.21 21.9% -0.3% 28.00 32.28 15.3% 33.45 3.6% 34.11

Total 15.88 24.43 22.54 41.9% -7.8% 21.33 23.27 9.1% 23.12 -0.6% 23.93 Margins Per Ton (US$'s)

Central App. 14.13 9.88 9.46 n.m. -4.3% 14.12 15.24 8.0% 23.50 54.2% 26.42 PRB 1.59 1.46 1.96 n.m. 34.2% 1.68 1.14 -31.8% 0.52 -54.1% 0.35 Western Bituminous 4.00 5.80 6.19 n.m. 6.7% 6.96 6.03 -13.3% 4.92 -18.5% 5.89

Total 2.79 3.27 3.41 22.2% 4.1% 3.81 3.53 -7.4% 3.97 12.4% 4.41 Sales Volumes (k tons)

Central App. 3,200 6,300 5,900 84.4% -6.3% 19,200 19,900 3.6% 19,150 -3.8% 19,750 PRB 34,600 28,800 32,200 -6.9% 11.8% 117,800 112,500 -4.5% 112,500 0.0% 112,500 Western Bituminous 4,200 4,200 3,900 -7.1% -7.1% 17,000 14,000 -17.6% 13,700 -2.1% 14,300

Total 42,000 39,300 42,000 0.0% 6.9% 154,000 146,400 -4.9% 145,350 -0.7% 146,550 Implied Total:Revenues (k US$'s)

Central App. 230,112 544,950 508,108 120.8% -6.8% 1,672,736 1,831,144 9.5% 1,925,462 5.2% 2,095,806 PRB 432,846 392,256 439,530 1.5% 12.1% 1,604,474 1,555,320 -3.1% 1,486,026 -4.5% 1,485,000 Western Bituminous 120,918 151,578 141,960 17.4% -6.3% 594,245 536,393 -9.7% 525,615 -2.0% 572,000

Total 783,876 1,088,784 1,089,598 39.0% 0.1% 3,871,455 3,922,857 1.3% 3,937,103 0.4% 4,152,806

Costs (k US$'s)Central App. 184,896 482,706 452,294 144.6% -6.3% 1,401,712 1,527,888 9.0% 1,475,428 -3.4% 1,573,968 PRB 377,832 350,208 376,418 -0.4% 7.5% 1,407,154 1,426,716 1.4% 1,427,017 0.0% 1,445,256 Western Bituminous 104,118 127,218 117,819 13.2% -7.4% 475,980 451,947 -5.0% 458,264 1.4% 487,837

Total 666,846 960,132 946,531 41.9% -1.4% 3,284,846 3,406,551 3.7% 3,360,708 -1.3% 3,507,062

Margin (k US$'s)Central App. 45,216 62,244 55,814 n.m. -10.3% 271,024 303,256 11.9% 450,034 48.4% 521,837 PRB 55,014 42,048 63,112 n.m. 50.1% 197,320 128,604 -34.8% 59,009 -54.1% 39,744 Western Bituminous 16,800 24,360 24,141 n.m. -0.9% 118,265 84,446 -28.6% 67,351 -20.2% 84,163

Total 117,030 128,652 143,067 22.2% 11.2% 586,609 516,306 -12.0% 576,395 11.6% 645,744

% chg vs.


13 April 2012

US Coal Sector 31

Companies Mentioned (Price as of 12 Apr 12) Alpha Natural Resources (ANR, $16.08, NEUTRAL [V], TP $18.00) Arch Coal, Inc. (ACI, $10.63, NEUTRAL [V], TP $12.00) Cloud Peak Energy (CLD, $15.41, NEUTRAL, TP $17.00) CONSOL Energy Inc. (CNX, $34.75, NEUTRAL, TP $40.00) Peabody Energy Corp (BTU, $29.34, OUTPERFORM [V], TP $44.00)

Disclosure Appendix

Important Global Disclosures I, Richard Garchitorena, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for ANR ANR Closing

Price Target

Price

Initiation/ Date (US$) (US$) Rating Assumption 7/31/09 33.31 38 N X 11/3/09 36.45 42 11/10/09 39.2 45 4/19/10 49.85 54 8/4/10 41.74 48 1/7/11 65.25 59 1/31/11 53.73 58 4/11/11 56.07 66 5/3/11 55.18 63 7/14/11 44.27 53 X 8/4/11 33.24 40 10/4/11 17.44 20 11/4/11 28.09 30 1/17/12 19.28 22

384245

54

48

5958

6663

53

40

20

30

22

7/31/09 7/14/11

N

14

24

34

44

54

64

Closing Price Target Price Initiation/Assumption Rating

US$

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for ACI ACI Closing

Price Target

Price

Initiation/ Date (US$) (US$) Rating Assumption 10/5/09 21.6 25 N 11/10/09 23.17 26 1/29/10 21.07 24 4/19/10 26.07 31 1/7/11 34.64 42 1/12/11 34.13 40 1/28/11 33.22 35 4/11/11 33.68 39 6/1/11 28.82 R 6/6/11 26.75 N 7/14/11 25.55 30 X 10/2/11 13.22 18 10/4/11 14.49 16 10/28/11 20.22 24 1/17/12 13.41 16 2/13/12 13.86 14

25 2624

31

4240

35

39

30

1816

24

1614

7/14/11

N

RN

9

14

19

24

29

34

39


US$


13 April 2012

US Coal Sector 32

3-Year Price, Target Price and Rating Change History Chart for CLD CLD Closing

Price Target

Price

Initiation/ Date (US$) (US$) Rating Assumption 1/11/10 16.8 21 O X 5/3/10 16.05 R 5/12/10 14.9 O 5/14/10 14.6 R 6/15/10 14.61 O 8/5/10 16.67 22 11/4/10 18.3 24 11/22/10 20.97 R 12/16/10 19.9 30 O 1/7/11 22.46 32 2/25/11 19.84 30 5/4/11 20.18 26 7/14/11 X 10/4/11 16.91 24 10/27/11 23.26 30 1/17/12 19.17 26 2/16/12 17.49 20

2122

24

30

32

30

26

24

30

26

20

1/11/10 7/14/11

OROR O

RO

12

17

22

27

32


US$


3-Year Price, Target Price and Rating Change History Chart for CNX CNX Closing

Price Target

Price

Initiation/ Date (US$) (US$) Rating Assumption 10/22/09 49 55 10/23/09 47.42 55 11/10/09 48.5 57 3/15/10 48.85 55 3/22/10 44.69 50 4/19/10 42.71 55 7/29/10 36.77 51 10/29/10 36.76 44 1/7/11 50.9 60 1/27/11 48.45 57 4/11/11 50.34 62 7/14/11 X 7/28/11 53.47 65 10/4/11 34.43 45 10/27/11 45.23 58 1/17/12 33.37 48 1/26/12 36.14 45

555557

55

50

55

51

44

6057

6265

45

58

4845

7/14/1124

29

34

39

44

49

54

59

64


US$


3-Year Price, Target Price and Rating Change History Chart for BTU BTU Closing

Price Target

Price

Initiation/ Date (US$) (US$) Rating Assumption 4/15/09 25.96 34 7/21/09 33.02 37 10/20/09 43.81 48 11/10/09 43.89 52 4/19/10 45.42 58 1/7/11 62.07 75 3/3/11 69.32 80 4/11/11 66.43 90 4/19/11 63.67 80 7/14/11 X 10/4/11 33.62 55 1/17/12 35.3 52 1/25/12 37.33 48

3437

4852

58

7580

90

80

555248

7/14/1124

34

44

54

64

74

84


US$


The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities.

13 April 2012

US Coal Sector 33

Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

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Global Ratings Distribution Outperform/Buy* 46% (60% banking clients) Neutral/Hold* 42% (57% banking clients) Underperform/Sell* 10% (51% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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See the Companies Mentioned section for full company names. Price Target: (12 months) for (ANR) Method: Our 12-month price objective of $18 per share for ANR represents 5.8x our 2013 EBITDA (earnings before interest, taxes, depreciation and amortization) estimate, which we believe represents a reasonable one-year forward EBITDA multiple given the current market environment. Risks: Similar to other coal companies, the primary risk to our $18 target price for ANR is weaker than expected coal prices, higher operating costs, lower exports and/or lower sales volumes. The business of mining involves risks related to operational efficiency, which could lead to lower than expected production and sales volumes. Operational costs such as raw material costs, labor, energy and fuel costs could also pressure margins. While we expect strong near-term cash flow and earnings due to the nature of longer-term contract pricing in the industry, current price assumptions may not be attained in the future. Price Target: (12 months) for (ACI) Method: Our $12 target price for ACI represents 6.5x our 2013 EBITDA (earnings before interest, taxes, depreciation and amortization) estimate, in line with the peer group average implied mutliple. Risks: Similar to other coal producers, the primary risk to our $12 target price for Arch Coal is lower than expected pricing, company-specific mining challenges, and/or higher than expected operating costs. Price Target: (12 months) for (CLD)

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US Coal Sector 34

Method: Our $17 target price for CLD is 4.2x our 2013 EBITDA (earnings before interest, taxes, depreciation, and amortization) estimate, a discount to the peer group because of weaker near-term market fundamentals vs. eastern US thermal and metallurgical coal, and limited growth/FCF (free cash flow) opportunities vs. the peers. Risks: We see several risks to our $17 target price for CLD. The primary is that underlying PRB coal prices do not achieve our estimates of $13/ton in 2012 and $13/ton in 2013. The primary engine behind our positive thesis towards CLD is our expectation for a rebound in PRB prices. To this end, if PRB prices decline further than our current 2012 base case assumption of $13/ton, and/or remain at $13/ton for longer than our current expectations, this would affect our target price. We also see company-specific risks of substantial cash outflow in 2012-14 in federal mining leases for rights to mine coal. Price Target: (12 months) for (CNX) Method: Our $40 price target for CNX represents 7.8x our 2013 EBITDA (earnings before interest, taxes, depreciation and amortization) estimate. Our multiple is in-line with the historical group average. Risks: Similar to other coal companies, the primary risk to our $40 target price for CNX is weaker than expected coal prices, higher operating costs, lower exports and/or lower sales volumes. The business of mining involves risks related to operational efficiency, which could lead to lower than expected production and sales volumes. Operational costs such as raw material costs, labor, energy and fuel costs could also pressure margins. While we expect strong near-term cash flow and earnings due to the nature of longer-term contract pricing in the industry, current price assumptions may not be attained in the future. Specific to CNX, natural gas prices will also influence results going forward given their signficant gas business. Price Target: (12 months) for (BTU) Method: Our 12 month target price of $44 for Peabody Energy is based on 6.2x our 2013 EBITDA (earnings before interest, taxes, depreciation & amortization) estimate, which represents the mid-point of what we consider a reasonable one-year forward range for the coal group. Risks: Primary risks to our $44 target price for Peabody Energy are: 1. lower than expected realized prices or sales volumes, 2. higher than expected operating costs, 3. operational issues at mining operations, 4.negative currency movements and 5. potential environmental and safety litigation. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. The subject company (ANR, ACI, CLD, CNX, BTU) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ANR, ACI, CLD, CNX, BTU) within the past 12 months. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (ACI, CLD, BTU) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (ACI) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (ACI, CNX) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ANR, ACI, CLD, CNX, BTU) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (ACI, CLD, BTU) within the past 12 months. As of the date of this report, Credit Suisse Securities (USA) LLC makes a market in the securities of the subject company (ANR, ACI, CLD, CNX, BTU). Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ANR, ACI, CLD, CNX, BTU) within the past 12 months.

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13 April 2012Americas / United States

Equity Research

US Coal Market Update Q2'12 v10.doc

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