Coal Will Rebound Slowly but Surely
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Natural Gas and coal are two of the basic fuels for generating electricity. Natural gas is difficult to transport, but it is more environmentally friendly than coal. In the midst of low prices, natural gas drillers reduced their drilling and now coal has slowly started to come back. Picking the best coal miner to invest in is critical because many miners are stuck in expensive formations or faraway from growth markets.
Where is the Growth?
Like many parts of the global economy, China and India are the growth story. In the name of increased safety, China is planning to close down a number of local mines. This will help to support imports. Over the long run Asian growth and technological development will help to maintain coal demand.
Every coin has two sides and the Asian coal market is no different. Australia already has a carbon tax and China is considering instituting a similar plan. Carbon taxes increase the cost of coal relative to cleaner fuels like natural gas or uranium. Even with this tax, demand for coal is expected to remain.
Where Are the Best Investments?
Peabody Energy (NYSE: BTU) is a major coal miner and a succinct way to buy a piece of the global market. It has mines in the United States and Australia. 2012 was a year of purging with the closure of the Willow Lake Mine and a number of asset write downs that left an overall loss of $2.20 per share. The recognition of these losses is a positive factor as it allows investors to jump in after the company has shut down low-quality assets.
One of Peabody's advantages is its assets in Australia. These mines give the company close access to the main growth markets of China and India. U.S. mines have more challenges as substantial export terminals along the western coast of the U.S. have proved difficult to develop.
The company is in good financial shape with a total debt to equity ratio of 1.27. As the market continues to improve, the debt load should be whittled down little by little. Peabody has a large number of mines in the low cost Powder River Basin. These help to maintain its strong gross margins of 26.6%. Overall Peabody is a strong long term investment with good access to the crucial Asian markets.
Market Vectors Coal ETF (NYSEMKT: KOL) is another way to play the coal industry. With 42.5% of holdings in the U.S., 21.0% in China, 10.1% in Indonesia, and 9.3% in Australia the ETF is almost evenly split between the Asian and U.S. markets. With a net expense ratio of 0.59% the ETF isn't terrible expensive. The average price to earnings ratio (P/E) of 11.3 shows that the industry is continues to trade at low valuations.
The large number of firms means that some non-coal exposure ekes in. The largest holding is CONSUL energy with a large amount of natural gas exposure. This is one downside for investors as direct coal exposure is more easily found through a company like Peabody. On the other hand, those who are comfortable buying into related markets will find this ETF a good fit.
Arch Coal (NYSE: ACI) is a major player in the U.S. coal market. It has mines in the Powder River Basin, Western Bituminous, and Appalachia Region. One of the firm's major strengths is the fact that the majority of its reserves are found in the low cost Powder River Basin in the Western U.S.
Overall Arch Coal is comes in second to Peabody. It does not have the same Australian mines close to China and India. Arch Coal's total debt to equity ratio of 1.94 is higher than Peabody's and Peabody's gross margin is significantly higher than Arch Coal's gross margin of 17.2%. Wall Street sees these differences and expects Arch Coal to lose $0.45 per share in 2014 while Peabody is expected to make $2.03 per share in 2014.
The Bottom Line
Natural gas prices are slowly inching upward and coal is starting to regain its advantage. Peabody is one of the best investments available with mines in the U.S. and Australia. It is expected to be profitable in 2014 while competitors like Arch Coal are expected to lose money. For investors uncomfortable investing in a single company and willing to accept exposure to related markets like natural gas, Market Vectors Coal ETF is a good option.
Joshua Bondy owns shares in Peabody Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!