Foundation Coal

Coal
U.S.
November 2, 2007 First Call Note
HOLD Uninspiring Q3 Results; Raising Target by Looking Out to 2009
„ Foundation Coal reported Q3 ongoing results of $0.07 versus the Street at $0.05.
Current Price However, estimates had been lowered in recent weeks after the company
$41.38 preannounced lower Northern Appalachian (NAPP) production.
„ Foundation lowered its forecast range. Its new 2007 forecast is for EPS of $0.75-
Target Price $0.90 versus $0.90-$1.50 previously.
$45.00 „ Foundation had another weak quarter pricing for its new Powder River Basin (PRB)
(Previous: $42.00)
contracts. On the conference call, management said that it was pleased, but not
overwhelmed by PRB pricing. According to our estimates, the company signed new
business at an average of just $10.15/ton in the PRB.
Market capitalization
$1,878 million „ We performed some sensitivity analysis on Foundation based on CONSOL’s recent
bullish pricing comments. If we use $53/ton CAPP steam, $55/ton for NAPP, $77/ton
Shares outstanding high-vol met coal from 2008-2010 (assuming no price inflation), our target price would
46.4 million only move from $45 to $46. This is as a result of Foundation being 93% hedged in
2008, which is the year these prices are well above our estimates, in general.
12-month high/low
$45.55/$29.75 „ We are maintaining our HOLD rating, but raising our target price for Foundation Coal
to $45 from $42. Our valuation is based on a detailed DCF for the coal business, and
Reuters FCL.N an estimated 6.5x 2009 EV/EBITDA multiple for the entire company. We are switching
Bloomberg FCL our EV/EBITDA estimate from 2008 to 2009, as we believe investors are likely to begin
looking at the 2009 markets, with the vast majority of 2008 steam coal already
contracted. Moving to 2009 is the main reason for our increased target price.
„ We are decreasing our 2007-2009 EPS estimates from $1.27, $2.15, and $3.85 to
$0.85, $1.50, and $2.64 respectively. Our lower 2007 estimates account for production
shortfalls (over half a million tons in Q3) in Northern Appalachia. For 2008 and 2008,
we are lowering estimates

YEAR-END EPS NEW EPS OLD P/E DIVIDEND YIELD

DEC ($) ($) (x) ($) (%)
2006A 0.67 0.67 61.8 0.20 0.5
2007E 0.85 1.27 48.7 0.24 0.6
Jeremy Sussman
U.S. Coal Analyst 2008E 1.50 2.15 27.6 0.28 0.7
212-698-3295 2009E 2.64 3.85 15.7 0.32 0.8

DISCLOSURES ARE LOCATED ON THE PAGE PRECEDING THE BACK PAGE STAFF LIST
 Foundation Coal

SUMMARY
Foundation Coal beat Q3 by $0.02 on an ongoing basis, coming in at $0.07 versus the consensus estimate of
$0.05. However, estimates had been lowered in recent weeks after the company preannounced lower
production at its Emerald mine in Northern Appalachia on October 3. The weak quarter had already been in
the stock as a result of the company’s October 3 preannouncement of production problems at Emerald.

We are maintaining our HOLD rating but raising our target price for Foundation Coal to $45 from $42.
Our valuation is based on a detailed DCF for the coal business, and an estimated 6.5x 2009E EV/EBITDA
multiple for the entire company. We are switching our EV/EBITDA estimate from 2008 to 2009, as we believe
investors are likely to begin looking at the 2009 markets, with the vast majority of 2008 steam coal already
contracted. This is the main reason for our increased target price.

KEY TAKEAWAYS
Weak Pricing: Foundation had another weak quarter pricing for its new PRB contracts. On the
conference call, management said that it was pleased but not overwhelmed by PRB pricing. According to our
estimates, the company signed new business at an average of $10.15/ton in the PRB, $48.12/ton in NAPP,
$51.50/ton for CAPP steam coal, and $85/ton for CAPP met coal. We view the CAPP prices positively. The
company signed just over 13 million tons total of new business from 2008-2010.

Price Sensitivity: On its conference call last week, CONSOL Energy said that it was seeing prices for 2008
that were essentially much higher than Street estimates. Domestically, for mid-sulfur NAPP coal, CONSOL
was looking at prices from $54-$56/ton. For CAPP coal, management’s estimates were from $52-$54/ton
domestically. For low-vol met coal, CONSOL believes prices are being signed between $95-$97/ton
domestically, or $95-$102 in the export market. For high-vol met coal, CONSOL sees prices at $74-$80/ton
both domestically and overseas. As such, we wanted to see what we would get for a target price, if we
modeled in the midpoint of the above pricing suggested by CONSOL’s management, holding all else equal. If
we use $53/ton CAPP steam, $55/ton for NAPP, $77/ton high-vol met coal from 2008-2010 (assuming
no price inflation), our target price would only move from $45 to $46. This is as a result of Foundation
being 93% hedged in 2008, which is the year these prices are well above our estimates, in general.

Production Problems: On October 3, Foundation announced that it was having production problems at its
Emerald Mine in Northern Appalachia. This was due to geological challenges encountered during the third
quarter. Sandstone intrusions slowed mining and reduced production by about 550k tons in August and
September. Foundation had planned to install a second longwall in the mine in Q4 to offset these geologic
problems, but that has been delayed until 2008. Foundation now projects full year 2007 production of nearly
6 million tons at the Emerald Mine, approximately 600k-700k tons lower than the company's previous
estimate. These estimates still hold true based on today’s earnings release and conference call.

Outlook: Foundation updated its forecast range since the last quarter. Its new lowered 2007 forecast is for
EPS of $0.75-$0.90. It was at $0.90-$1.50 previously. The Street was at $1.06 before Q3 earnings.

Margins: Margins per ton were down by $0.37 from Q2, coming in at $3.69/ton, driven by lower price
realizations. Cost control was actually fairly strong, as costs per ton decreased from $15.74 in Q2 to $15.39
in Q3.

VALUATION
We are raising our target price for Foundation Coal to $45 from $42 based on a detailed DCF for the coal
business, and an estimated 6.5x 2009 EV/EBITDA multiple for the entire company. We are switching our
EV/EBITDA estimate from 2008 to 2009, as we believe investors are likely to begin looking at the 2009
markets, with the vast majority of 2008 steam coal already contracted.

We are decreasing our 2007-2009 EPS estimates from $1.27, $2.15, and $3.85 to $0.85, $1.50, and $2.64
respectively. Our lower 2007 estimates account for production shortfalls (over half a million tons in Q3) in
Northern Appalachia. For 2008 and 2008, we are lowering estimates to primarily to reflect lower-than-

2
 Foundation Coal

expected realized pricing in the Powder River Basin. In Q2 and Q3, Foundation signed significant tonnage in
the PRB at an average price below $10.50/ton. This pricing is disappointing, in our view.

FOUNDATION COAL DCF VALUATION

($MM) 2007E 2008E 2009E 2010E Terminal
Sales (MM tons) 73.6 73.8 74.8 75.8 NA
Realized Prices ($/ton) 19.8 21.2 22.7 24.9 NA
EBITDA 301.1 350.5 421.8 556.6 514.9
Capex (220.0) (215.0) (240.0) (190.0) (190.0)
Cash Taxes (9.3) (20.7) (37.4) (70.0) (64.8)
Interest Tax Shield Adj (11.0) (11.7) (11.5) (11.3) (11.3)
Working Cap (15.0) (15.0) (15.0) (15.0) (15.0)
Free Cash Flow ($MM) 45.8 88.1 117.8 270.3 233.8

Valuation Summary Statistics

Total EV Firm 2,726.14 WACC 9.2%
less: net debt (638.95) Terminal EBITDA Growth -7.5%
Equity Value 2,087.19 Terminal Year 2011
# shares 46.11 Terminal EV-EBITDA Multiple 6.5
Per Share Value $45.26 PV Terminal CF 2,302.4
Source: Natixis Bleichroeder estimates, company documents

RISK
Economic Sensitivity: We believe the coals are highly dependent on electric demand, which is in turn
dependent on economic growth (GDP, employment, and industrial production). If the economy moves into a
recession, this would negatively affect demand in the coal sector.

Operational Shortfalls: The coal industry is subject to operating risks in the form of unexpected production
shortfalls, transportation challenges, and swings in its feed stocks (e.g., tires, diesel, equipment, explosives,
and steel roof bolts).

Regulatory Changes: The coal industry is subject to changes in safety regulations (especially given the
accidents in 2006) as well as regulations governing its principal customers, the electric utilities. The long-
term thesis for coal is dependent on the construction of new baseload coal plants being constructed —
permitting challenges could delay or prevent this future demand catalyst.

Demand: The coal industry is subject to factors that drive overall electric demand such as weather and
economic growth. Weaker-than-expected conditions could result in lower-than-expected demand and pricing
as experienced in 2006.

Volatility: Coal equities have traded with a high degree of volatility (average beta of 1.62 versus the S&P
500) and tend to move with overall energy sentiment.

3
 Foundation Coal

TARGET PRICE HISTORY

Full reports of covered companies are available on request.

IMPORTANT DISCLOSURES AND INFORMATION ABOUT THE USE OF THIS DOCUMENT
The views expressed in this report accurately reflect the personal views of the author(s) of this report. The author(s) of this report
received no investment banking-related compensation or other supplemental payments in connection with the specific views
expressed herein.
This research is disseminated from the United Kingdom by Natixis Bleichroeder, a division of Natixis, London Branch, which is
authorized by the Comité des Établissements de Crédit et des Entreprises d'Investissement and regulated by the Financial Services
Authority for the conduct of business in the U.K.
This Communication is only made to or directed at Market Counterparties/Intermediate Customers (Investment Professionals) whose
ordinary business activities involve carrying on investments in shares, bonds and associated securities and/or derivative financial
products and who have professional experience in such investments. The investments and investment services to which this
Communication relates are only available to such investment professionals. Any person who is not an investment professional must
not rely upon this Communication.
NBI RATING DEFINITIONS % OF STOCKS COVERED % IB SERVICES
BUY: potential return is >15% above the current price 58% 18%
HOLD: potential return is -15% to +15% of the current price 34% 2%
SELL: potential return is >15% below the current price 8% 0%
© 2007 Natixis Bleichroeder Inc. All rights reserved. Printed in U.S.A. Reproduction or quotation in whole or in part without prior written permission by Natixis
Bleichroeder Inc. is forbidden. All information in this report is subject to change at any time without prior notice. The information contained herein, while not
guaranteed, has been obtained from sources we consider reliable. This information is taken from company reports and documents and/or Natixis Bleichroeder Inc. or
any of its affiliates’ estimates, unless otherwise noted. This is not a solicitation of any order to buy or sell. Past performance is not indicative of future results.
Additional information is available upon request from Natixis Bleichroeder Inc., 1345 Avenue of the Americas, New York, NY 10105 / 1-212-698-3000.

4
[CONTINUED FROM BACK PAGE]
Healthcare
Dr. Ashim Anand Medical Devices, U.S. ashim.anand@blr.natixis.com 1-212-698-3141
Dr. Corey Davis Specialty Pharmaceuticals, U.S. corey.davis@blr.natixis.com 1-212-698-3153
Uy Ear Specialty Pharmaceuticals, U.S. uy.ear@blr.natixis.com 1-212-698-3149
Bernard Foglino Healthcare Providers, Europe bernard.foglino@blr.natixis.com 33-1-58-55-9093
Sylvain Goyon Pharmaceuticals, Europe sylvain.goyon@sec.natixis.com 33-1-58-55-0462
Akos Herczenik Pharmaceuticals, Central and Eastern Europe akos.herczenik@raiffeisen.hu 36-1-484-4812
Philippe Lanone Pharmaceuticals, Europe philippe.lanone@sec.natixis.com 33-1-58-55-0503
Jon LeCroy, M.D. Pharmaceuticals, Biotechnology, U.S. jon.lecroy@blr.natixis.com 1-212-698-3185
Oren Livnat Specialty Pharmaceuticals, U.S. oren.livnat@blr.natixis.com 1-212-698-3182
Cédric Moreau Pharma, Healthcare Services and Equipment, Europe cedric.moreau@sec.natixis.com 33-1-58-55-0360
Béatrice Muzard Pharmaceuticals, Europe beatrice.muzard@sec.natixis.com 33-1-58-55-0513
Stephen B. Shankman Healthcare Services, U.S. stephen.shankman@blr.natixis.com 1-212-698-3148
Alex To Biotechnology, U.S. alex.to@blr.natixis.com 1-212-698-3146
Katherine Wearne Pharmaceuticals, Biotechnology, U.S. katherine.wearne@blr.natixis.com 1-212-698-3151
Joshua Zable Medical Devices, U.S. joshua.zable@blr.natixis.com 1-212-698-3147
Hotels and Tourism, Catering, Leisure Supplies
Geoffrey d'Halluin Hotels and Tourism, Europe geoffrey.dhalluin@sec.natixis.com 33-1-58-55-0536
Sarah Emsellem Hotels and Tourism, Leisure Supplies, Europe sarah.emsellem@sec.natixis.com 33-1-58-55-0362
André Juillard Hotels and Tourism, Catering, Europe andre.juillard@sec.natixis.com 33-1-58-55-0547
Industrials, Chemicals and Gases, Delivery Services
Caroline Barbery Industrials, Holdings, Delivery Services, Europe caroline.barbery@sec.natixis.com 33-1-58-55-9113
Clément Célérier Chemicals and Gases, Europe clement.celerier@sec.natixis.com 33-1-58-55-0506
Bernard Foglino Delivery Services, Europe bernard.foglino@sec.natixis.com 33-1-58-55-9093
Reinhard Ebenauer, CEFA Industrials, Central and Eastern Europe ebenauer@rcb.at 43-1-51520-175
Information Technology Services, Software
Richard Maxime Beaudoux Software, IT Services, Europe richard-maxime.beaudoux@sec.natixis.com 33-1-58-55-0348
Gwénaël Giard Software, IT Services, Europe gwenael.giard@sec.natixis.com 33-1-58-55-0496
Leopold Salcher Information Technology, Central and Eastern Europe salcher@rcb.at 43-1-51520-176
Luxury Goods, Cosmetics and Personal Care
Shamina Bhaidjy Luxury Goods, Cosmetics and Personal Care, Europe shamina.bhaidjy@sec.natixis.com 33-1-58-55-0491
Tamare Evren Luxury Goods, Europe tamare.evren@sec.natixis.com 33-1-58-55-0545
Loïc Morvan Luxury Goods, Cosmetics and Personal Care, Europe loic.morvan@sec.natixis.com 33-1-58-55-9691
Media and Entertainment
Claire Barbaret Radio and TV, Support Services, Other Media, Europe claire.barbaret@sec.natixis.com 33-1-58-55-9663
Johann Choux Publishing, Support Services, Other Media, Europe johann.choux@sec.natixis.com 33-1-58-55-0457
Chris Ferris Media and Entertainment, U.S. chris.ferris@blr.natixis.com 1-212-698-3478
Alan Gould, CFA Media and Entertainment, U.S. alan.gould@blr.natixis.com 1-212-698-3158
Richard Houbron Advertising, Publishing, Other Media, Europe richard.houbron@sec.natixis.com 33-1-58-55-0502
Matthieu Mouly Radio and TV, Europe matthieu.mouly@sec.natixis.com 33-1-58-55-0626
Charlotte Ruelland Radio and TV, Europe charlotte.ruelland@sec.natixis.com 33-1-58-55-0523
Jeffrey Shelton, CFA Media and Entertainment, U.S. jeffrey.shelton@blr.natixis.com 1-212-698-3152
Emily Stein Media and Entertainment, U.S. emily.stein@blr.natixis.com 1-212-698-3195
Telecommunications Equipment and Services, Electronic Equipment, Semiconductors
Eric Beaudet Telecommunication Services, Europe eric.beaudet@sec.natixis.com 33-1-58-55-0537
Jacques de Greling Telecommunication Services, Europe jacques.degreling@sec.natixis.com 33-1-58-55-0483
Stéphane Houri Semiconductors, Europe stephane.houri@sec.natixis.com 33-1-58-55-0365
Franck Maccary Telecom Equipment, Europe franck.maccary@sec.natixis.com 33-1-58-55-0507
Benoît Maynard Telecommunication Services, Europe benoit.maynard@sec.natixis.com 33-1-58-55-0511
Gilbert Soubie Semiconductors, Europe gilbert.soubie@sec.natixis.com 33-1-58-55-0366
Jindrich Svatek Telecom, Central and Eastern Europe jindrich.svatek@rb.cz 42-02-2114-1841
Tony Taillandier Electronic Equipment, Support Services, Europe tony.taillandier@sec.natixis.com 33-1-58-55-0367
Travel and Business Services
Teresa Schinwald Transport, Logistics, Central and Eastern Europe schinwald@rcb.at 43-1-51520-179
Technical and Graphical Analysis
Eckart Mildenstein Graphical Equity Market Analysis eckart.mildenstein@blr.natixis.com 1-530-756-8682
John Roque Technical Analysis, U.S. john.roque@blr.natixis.com 1-212-698-3065
Adolfo Rueda, CMT Technical Analysis, U.S. adolfo.rueda@blr.natixis.com 1-212-698-3482
Country Specialists
Alexander Balakhnin Country Specialist, Russia abalakhnin@raiffeisen.ru 7-095-721-9934
Ivana Blaskovic Country Specialist, Croatia ivana.blaskovic@rba-zagreb.raiffeisen.at 385-1-6174-335-118
Dorin Boboc Country Specialist, Romania dorin.boboc@rzb.ro 40-21-306-1307
Madina Butaeva Country Specialist, Russia (Head) mbutaeva@raiffeisen.ru 7-495-721-9928
Bogdan Campianu Country Specialist, Romania (Head) bogdan.campianu@rzb.ro 40-21-306-1238
Marcin Palenik Country Specialist, Poland marcin.palenik@raiffeisen.pl 48-22-585-3172
Kornél Sarkadi Szabò Country Specialist, Hungary sarkadi.szabo.kornel@raiffeisen.hu 36-1484-4812
Anna Yudina Country Specialist, Russia ayudina@raiffeisen.ru 7-495-721-9938
TRANSATLANTIC EQUITY RESEARCH
Natixis Bleichroeder research is provided by a group of industry-oriented experts with a mid cap and small cap focus. Based in the
United States, the U.K., France, Austria and Eastern Europe, our team of more than 100 analysts works closely with each other to offer
our clients a “transatlantic” approach that examines the effects of technological, market and regulatory developments across both
continents on the companies under coverage. Our analysts make frequent visits to the managements of companies under coverage and
receive information furnished by an extensive network of global contacts. Analysts in the U.S., the U.K., and France are part of the
Natixis group; those based in Austria and Eastern Europe are employed by Raiffeisen Centrobank. Research from Raiffeisen Centrobank
is made available to our clients through an alliance agreement.
Aerospace/Defense
Antoine de Montille Aerospace/Defense antoine.montille@sec.natixis.com 33-1-58-55-9659

Automotive
Alexis Albert Automotive Components, Truck Makers, Europe alexis.albert@sec.natixis.com 33-1-58-55-0459
Georges Dieng Automotive Components, Car Makers, Europe georges.dieng@sec.natixis.com 33-1-58-55-0534

Banking, Insurance, Financial Services, REITs

Guy Akouvi Insurance, Europe guy.akouvi@sec.natixis.com 33-1-58-55-0634
Pascale Decque Banks, Northern and Southern Europe pascale.decque@sec.natixis.com 33-1-58-55-0485
Alex Koagne Banks, Northern and Southern Europe alex.koagne@sec.natixis.com 33-1-58-55-0439
Stefan Maxian, CFA Banking and Insurance, Central and Eastern Europe maxian@rcb.at 43-1-51520-177
Olivier Pauchaut Insurance, Europe olivier.pauchaut@sec.natixis.com 33-1-58-55-0517
Christophe Ricetti Banks, Northern and Southern Europe christophe.ricetti@sec.natixis.com 33-1-58-55-0522
Bénédicte Rodarie Insurance, Europe benedicte.rodarie@sec.natixis.com 33-1-58-55-0426
Benoît Valleaux Insurance, Europe benoit.valleaux@sec.natixis.com 33-1-58-55-9680

Construction & Concessions, Real Estate

Marlène Benon Real Estate, Europe marlene.benon@sec.natixis.com 33-1-58-55-0539
Athmane Benzerroug Construction & Concessions, Europe athmane.benzerroug@sec.natixis.com 33-1-58-55-0541
Charles Cuny Real Estate, Europe charles.cuny@sec.natixis.com 33-1-58-55-9641
Rafic El Haddad Building Materials, Europe rafic.elhaddad@sec.natixis.com 33-1-58-55-0489
Bernard Foglino Support Services, Europe bernard.foglino@sec.natixis.com 33-1-58-55-9093
Alain Ourvoy Building Materials, Europe alain.ourvoy@sec.natixis.com 33-1-58-55-9209
Tony Taillandier Construction & Concessions, Europe tony.taillandier@sec.natixis.com 33-1-58-55-0367

Consumer Goods, Retailing

Boris Bourdet Non Food Retailing, Europe boris.bourdet@sec.natixis.com 33-1-58-55-0508
Claudie Casimir Food Retailing, Europe claudie.casimir@sec.natixis.com 33-1-58-55-0339
Christian Devismes Food Retailing, Europe christian.devismes@sec.natixis.com 33-1-58-55-9120
Olivier Lebrun Consumer Goods, Europe olivier.lebrun@sec.natixis.com 33-1-58-55-9171

Energy, Commodities, Utilities

Julie Arav Utilities, Europe Julie.arav@sec.natixis.com 33-1-58-55-0705
Céline Chérubin Utilities, Europe celine.cherubin@sec.natixis.com 33-1-58-55-0633
Miguel Folly Gas, Europe miguel.folly@sec.natixis.com 33-1-58-55-9654
Jonathan Guy Metals and Mining, Europe jonathan.guy@natixis.co.uk 44-207-220-5175
Darko Kovacic Oil and Gas, Central and Eastern Europe darko.kovacic@r-kb.si 38-62-2293-192
Julien Laurent Energy Equipment and Services, Europe julien.laurent@sec.natixis.com 33-1-58-55-0538
Baptiste Lebacq Oil, Energy Equipment and Services, Europe baptiste.lebacq@sec.natixis.com 33-1-58-55-9102
Catherine Leveau Oil, Energy Equipment and Services, Europe catherine.leveau@sec.natixis.com 33-1-58-55-0505
Mark Manley, CFA Alternative Energy, U.S. mark.manley@blr.natixis.com 1-212-698-3197
Houston Netherland Exploration and Production, U.S. houston.netherland@blr.natixis.com 1-713-751-1637
Philippe Ourpatian Utilities, Europe philippe.ourpatian@sec.natixis.com 33-1-58-55-0516
Anne Pumir Oil, Energy Equipment and Services, Europe anne.pumir@sec.natixis.com 33-1-58-55-0520
Roger Read, CPA Oil Services, U.S. roger.read@blr.natixis.com 1-713-751-1632
Richard Slape Oil, Gas, Europe richard.slape@natixis.co.uk 44-207-220-5174
Jeffrey Spittel Oil Services, U.S. jeffrey.spittel@blr.natixis.com 1-713-751-1652
Jeremy Sussman Coal, U.S. jeremy.sussman@blr.natixis.com 1-212-698-3295
Dr. Klára Székffy, CEFA Oil, Gas, Central and Eastern Europe szekffy@rcb.at 43-1-51520-171
Tony Taillandier Utilities, Europe tony.taillandier@sec.natixis.com 33-1-58-55-0367
Pauline Toffier Refining, Europe pauline.toffier@sec.natixis.com 33-1-58-55-0529
John White Exploration and Production, U.S. john.white@blr.natixis.com 1-713-751-1638
Tobias Winter, CFA Basic Materials, Central and Eastern Europe winter@rcb.at 43-1-51520-174

Electrical Equipment
Ludovic Debailleux Electrical Equipment, Europe ludovic.debailleux@sec.natixis.com 33-1-58-55-0685
Arnaud Schmidt Electrical Equipment, Europe arnaud.schmit@sec.natixis.com 33-1-58-55-9685

Food and Beverage, Tobacco

Joséphine Chevallier Beverages, Other Consumer Goods, Europe josephine.chevallier@sec.natixis.com 33-1-58-55-9655
François Digard Food, Europe francois.digard@sec.natixis.com 33-1-58-55-0340
Alison Donohoe Beverages, Europe alison.donohoe@sec.natixis.com 33-1-58-55-0447
Virginia Heeribout Tobacco, Other Consumer Goods, Europe virginia.heeribout@sec.natixis.com 33-1-58-55-0499
Orianne Segaud Tobacco, Other Consumer Goods, Europe orianne.segaud@sec.natixis.com 33-1-58-55-0095

[CONTINUED ON INSIDE BACK PAGE]