Great Time to Buy 3 Bargain Coal Stocks

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In previous eras, coal dominated the energy consumption market, being both abundant and cheap.  However. over the past few years, the popularity of coal has plummeted because of a hostile political environment, the low price of natural gas, and a worldwide economic slowdown. But contrary to popular sentiment, global demand for coal is expected to increase. To paraphrase Mark Twain, the death of coal as an energy source has been greatly exaggerated.

Coal prices are ready for a revival

There are many reasons to be bullish on coal for the long haul:

  • The world continues to consume about 8 billion tons of coal per year. According to the Paris-based International Energy Agency, annual coal demand is expected to grow by 1.2 billion tons in the next 5 years. In fact, coal is expected to soon overtake oil as the world’s largest source of energy.
  • The price of natural gas has increased dramatically over the last couple of years making switching to gas not as economically attractive as it once was. Even with the low price of natural gas, 38% of the electricity in the US is from coal, compared with only 28% from natural gas.
  • Technology is coming to coal’s rescue. Over a dozen new carbon-removal technologies are being evaluated in the hope of making "clean coal" a reality.  According to the U.S. Energy Information Administration, emissions from coal consumption are at the lowest level since the Clean Air Amendment was enacted.  The White House has allocated $3.4 billion for developing better clean coal technologies.
  • Emerging markets are heavily dependent on coal. China consumes about 4 billion tons of coal per year, about the same amount as the rest of the world combined! India’s demand for coal continues to grow, increasing by 23% last year.

The projected large increases in demand will drive prices higher. However, the bad press about coal has mercilessly driven down stock prices, creating some fantastic bargains. Over the long run, the coal companies will revert back to their former glory as technology improves and more people realize that coal is here to stay. Three of the best coal stocks are discussed below.

World’s largest

Peabody Energy (NYSE: BTU) is the world’s largest private-sector coal company and is expected to sell more than 230 million tons of coal this year. It has mines and offices in 25 countries. Peabody operates some of the lowest-cost mines, located in the coal-rich Illinois and Powder River Basins in the United States and in the Queensland and New South Wales provinces in Australia.  Revenues in 2012 reached a new high of $8.08 billion.  Peabody has a huge 9.3 billion tons of proven and probable reserves. With cash per share of $1.94, a price-to-book of only 0.92 and price-to-sales of 0.56, the stock is poised to take full advantage of the recovery in coal prices. As a bonus, the company pays over 2 % in dividends.

Leading supplier of metallurgical coal

Alpha Natural Resources (NYSE: ANR) is the leading supplier in the United States for metallurgical coal, which is used to make steel. Alpha Natural Resources is also a major supplier of thermal coal for electric utilities. It has 107 active mines and 26 processing plants in the Powder River basin and the Appalachia region.  Last year it shipped over 108 million tons, which generated $7 billion in revenue. Alpha Natural Resources also has impressive reserves of 4.5 billion tons, about a third of which are high quality metallurgical coal. The metallurgical reserves are the largest in the United State. Alpha Natural Resources sells at an incredibly low price-to-sales of 0.17 and price-to-book of only 0.22.  At this low price, with its large reserves, and with cash per share of $3.36, it is a good candidate to be taken over by a larger player. Alpha Natural Natural Resources does not pay a dividend but now is the time to buy  while it is still a cheap.

Second largest producer in U.S.

Arch Coal (NYSE: ACI) is the second largest coal producer in the Unites States with 32 active mines in the Powder River Basin, Central Appalachia, and the Western Bituminous region.  It sold 140 million tons of coal in 2012, which generated $4.2 billion in revenue.  It has massive reserves of over 5.5 billion tons.  The company has a rock bottom price-to-sales of only 0.2  and price-to-book of only 0.3.  With $4.21 cash per share, Arch Coal is also a candidate to be taken over. It is an excellent way to play a rebound in coal prices and you will even receive a nice dividend of over 3% while you wait for coal prices to recover.

Foolish Bottom Line

Despite having to overcome some environmental obstacles, coal consumption is on the rise. Coal stocks are at the beginning of a long term bull market as demand outstrips supply. Prices are still in the bargain basement, so if you can tolerate the volatility, now is a great time for patient investors to buy.

John Dowdee has no position in any stocks mentioned. 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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