For Coal Miners, Is India the New China?

Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

India isn't just a blip in the coal market. It is projected to import more coal than China in the coming years. Given Obama's recent announcement of tighter restrictions on coal power plants, U.S. coal miners may find their solace in India. China has been the growth story for sellers of raw materials, but the nation is slowing down. Still, there are a few smart companies that have not let themselves become completely dependent on the Middle Kingdom. 

Is India's Demand Dependable? 

Richard Morse and Gang He wrote a paper at Stanford University showing that India's shortfall in coal production is structural. This is in stark contrast to China's coal production, where temporary pricing differentials within China's market are one of the main drivers of its imports. Also, the Chinese government's push to clean up the environment and increase safety has led to a number of mine closures.

China has significant coal resources. It uses coal imports as a stop gap measure while it cleans up its industry and expands its rail network. India is simply a more stable market for coal imports than China.

Where to Invest? 

<img alt="" src="http://media.ycharts.com/charts/3586b9e8f5a5284bacff960dea56bf81.png" />

BHP Total Return Price data by YCharts

BHP Billiton (NYSE: BHP) is a diversified miner with interests in many resources, including coal. Lately its thermal coal operations have been struggling due to a number of mishaps in its mines. It recently canceled a $3 billion coking coal mine in Queensland, Australia. It also canceled its plans to expand the Olympic Dam copper and uranium mine. The company's operations are close to China, and the prospect of a slowing Chinese economy has forced the company to cut back. 

BHP Billiton isn't the best way to play India's growing coal demand. This company is so massive that it is better seen as a bet on the world's raw resource usage. The firm operates a number of facilities in Australia, and the nation's tight labor market has put pressure on the firm's margins. Even though its 21.5% profit margin may fall in the coming years, its total debt to equity ratio of 0.53 and yield of around 4% make it an interesting dividend play. 

U.S. Coal Miners

Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) are two similar, but very different U.S. coal miners. Arch Coal operates a number of metallurgical and thermal coal mines throughout the U.S. It is in damage control mode and trying to bring its costs under control as soon as possible. It recently sold a number of assets in Utah to help increase its liquidity. Given the lack of growth in the domestic U.S. coal market, it is with good reason that Wall Street expects the company post earnings per share (EPS) of $-0.71 in 2014.

Peabody's stock hasn't fared very well over the past couple years, but the company is not a lost cause. The firm has mines in Australia and trading offices in Indonesia. These assets place it close to the Indian import market. Still, the falling price of coal coupled with Australia's high costs forced the company to cut 450 Australian jobs in 2012.

Don't Ignore Peabody

As India becomes more important to coal miners, Peabody is in a better position than Arch Coal. Peabody's Australian mines and Indonesian operations place it very close to Asia, while Arch Coal is stuck shipping its coal all the way from the United States. 

Peabody's profit margin -9.9% and earnings before interest and taxes (EBIT) margin of -0.9% need to improve, but they are better than Arch Coal's profit margin of -19.1% and EBIT margin of -19.9%. Also, Peabody's total debt to equity ratio of 1.26 is better than Arch Coal's total debt to equity ratio of 1.84.

Conclusion

India faces a steady coal short fall and its demand for imports will help to save miners. Mining giant BHP Billiton is not a growth stock, but it is an attractive dividend play with a yield around 4%. Unlike Arch Coal, Peabody is a good turnaround play. The company has assets close to India and other Asian coal buyers, while Arch Coal is stuck mining all of its coal in the United States. 

 

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Joshua Bondy owns shares of 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!

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