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Analyst: Resolution of rail dispute in Australia could affect US met coal stocks

An Australian railroad issue watched closely by international metallurgical coal buyers and sellers could soon be resolved, taking the air out of recent high prices, an analyst said.

A dispute over regulated returns between Australian regulators and Aurizon Holdings Ltd. that threatened to curtail at least 20 million tonnes of coal from the export market per year may be close to a resolution, Seaport Global Securities analyst Mark Levin wrote in a June 15 note. Supply uncertainty around the dispute was one of several major factors causing metallurgical coal prices to rise to over $200/tonne on the spot market, Levin said.

"While coal stocks could react negatively to news of a settlement (if and when it occurs), we remind investors that the met coal market remains tight, even without recent help from Aurizon," Levin wrote. "Very few met coal mines have been built around the world the last few years. Moreover, we think the project pipeline queue ... looks remarkably light given how high met coal prices have been for the last 18 months."

Coal equities are still discounting a metallurgical coal price closer to $150/tonne to $155/tonne. If a resolution is announced, Levin expects it to affect Warrior Met Coal Inc., Teck Resources Ltd., Arch Coal Inc., Ramaco Resources Inc. and Natural Resource Partners LP.

He said the situation is "more complicated" for Peabody Energy Corp., which ships metallurgical coal on Aurizon's lines, because a resolution would remove supply uncertainty but potentially lower prices. In April, Peabody said it did not expect the dispute to lower shipments.