Alpha Natural drops 3 points dollar neutral on outlook; Schlumberger, Freeport also lower outlooks

By Rebecca Melvin

New York, Dec. 3 - Convertibles put in a mixed showing Wednesday as volatility in equities remained high.

Alpha Natural Resources Inc. convertibles were called lower by 3 points on a dollar-neutral basis based on the coal company's lowered outlook. It cut fourth-quarter estimates for coal shipments and said its 2009 outlook is uncertain due to deterioration in steel markets that use coal.

Schlumberger Ltd., which hasn't been a name in trade for awhile since it was so far in the money, has been trading actively to the downside in the last couple of days, traders said.

On Wednesday, the Schlumberger 2.125% convertibles traded lower with its shares after the Houston-based oil-services company warned that its 2008 profit will fall below Wall Street's expectations. On Monday it dropped after the company's ratings were cut.

Freeport-McMoRan Copper & Gold Inc. was also lower outright after the mining concern announced it is reducing its copper production and sales estimates and suspending its common stock dividend.

On the upside, Medtronic Inc. edged higher despite a newspaper report regarding a lawsuit over a patient death tied to Medtronic's InFuse Bone Graft product. The suit alleges that a Medtronic technical consultant improperly recommended off-label use of the product.

But the Minneapolis-based medical device maker issued a response to the article, stating its technical consultant in the case denies doing so.

Alpha drops 3 points

Alpha Natural's 2.375% convertible senior notes due 2015 were called lower dollar neutral by 3 points, trading at 58.5 versus a share price of $16.25 intra-session and seen lower than that level, at 54.50 to 56.50, versus a share price of $17.13, which was down $1.81, or 10%, on the day.

The Abington, Va.-based coal company said that due to lower demand for steel products and subsequent lower demand for raw materials, the company is reducing its 2008 production and financial guidance, and its Kingwood Mining Co. subsidiary plans to cease coal mining operations at the Whitetail Kittanning mining complex in West Virginia at the end of December.

Production is now expected to be 23.5 million to 23.8 million tons, down from its July 29 estimate of 24.5 million to 25 million tons.

Purchased coal will be 4.6 million to 4.9 million tons, down from its July 29 estimate of 5 million to 5.5 million tons.

Revenue will be $2.20 billion to $2.26 billion, down from the former estimate of $2.20 billion to $2.40 billion; while net income will be reduced to $175 million to $185 million, from $230 million to $270 million.

The company said its revised guidance is also affected by several one-time items like an estimated $35 million pretax charge related to closing the Whitetail Kittanning mine complex, a $31 million pretax charge from an accounting adjustment related to the value of diesel fuel and other contracts and about $60 million net proceeds from the termination of the planned merger with Cliffs Natural Resources Inc. in November.

As of the end of November, Alpha had available liquidity of close to $1 billion, including cash and cash equivalents of about $700 million. Total debt outstanding at the end of November was about $521 million, with maturity dates ranging from October 2012 to April 2015.

On Nov. 28, the coal company's convertibles were bid at 60, and before that they were at 59, a Connecticut-based sellside analyst said.

Schlumberger lower on view

Schlumberger's 2.125% convertible senior debentures due 2023 were seen ending the day at about 117.625 versus a share price of $42.53, compared with 120.395 versus a share price of $43.92 on Tuesday.

Schlumberger common shares settled down $1.39, or 3%, at $42.53. But the stock is down more than 50% for the year.

"We saw them today," a Connecticut-based sellsider said of the A+ rated company. "The stock was down, and the bonds were down with them."

Back in October there was an asking price of 124.5 on the 2.125s. On Wednesday they were down to 121 in the morning and by midmorning down to 112.5. On Tuesday, they traded as low as 106, before settling up from that level, according to NASD Trace.

"The picture has changed. It has had a very, very low premium, but as it gets closer to par, they're getting a little bit of premium. So I guess people have to make adjustments as the bonds try to separate from the stock," the analyst said.

"The convertible got whacked on the credit side Dec. 1 and today they got whacked on the stock side," he said.

In January 2006, the Schlumberger 2.125% convertibles stood at 160, and in July 2006 they were at 175.

Freeport-McMoRan lower

Freeport-McMoRan 6.75% mandatory convertible preferreds due 2010 were seen at 33 bid, 34 offered on Wednesday, compared to 38 on Tuesday.

The Freeport-McMoRan 5.5% convertible perpetual preferreds were bid in points.

Freeport-McMoRan's common stock fell $3.77, or 17%, to $18.05.

The mining concern announced it's reducing its copper production and sales estimates by 5% in 2009 to 200 million pounds and by 11% in 2010 to 500 million pounds.

The company also suspended its common stock dividend. The move came following the sharp 50% year-to-date drop in copper prices.

Copper is down 4%, back down to 2005 levels. Gold, which is the larger of the two metals mined by Freeport, was a little lower at about the $772-per-ounce level.

Medtronic edges higher

Medtronic's 1.625% convertibles due 2013, or the B paper, traded at 90 versus a share price of $29.25. They closed at about that level versus a higher stock price of $30.29, compared to 89 on Tuesday.

Medtronic's 1.5% convertibles due 2011, or the A paper, traded at 84 versus the intraday $29.25 stock price.

Medtronic shares settled 99 cents, or 3.4%, higher at $30.29.

The Wall Street Journal reported that a suit filed Tuesday in federal court in Los Angeles is the first to allege that InFuse was responsible for a death. The suit alleges that a Medtronic salesman urged the patient's surgeon use InFuse in her neck surgery even though such use wasn't FDA-approved.

Medtronic issued a statement Wednesday that said the physician who performed the procedure claims using InFuse was his personal decision.

"The decision to use InFuse during surgery was a clinical decision based on my personal experience with the product and evidence presented at our professional medical society meetings, and had nothing to do with the Medtronic technical expert," the statement cited the surgeon as saying.

The company does not promote off-label use of products, and physicians decide how medical products are ultimately used to the benefit of patient, the statement said.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Freeport-McMoRan Copper & Gold Inc. NYSE: FCX

Medtronic Inc. NYSE: MDT

Schlumberger Ltd. NYSE: SLB

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