My Take on 5 U.S. Coal Producers in 724 words
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've written a lot about coal markets and specific coal companies over the past year. My background is as a senior Industrials and Natural Resources sector analyst at a $3 billion hedge fund. I'm now an independent consultant. Since I left the hedge fund world, global coal stocks have been slaughtered. The following is my take on 5 U.S. based names.
Peabody Energy (NYSE: BTU): Starting with the biggest, it's important to know that half of Peabody's EBITDA comes from Australia. Investors tend to think of Peabody as the class act of the sector. However, the company joined Alpha Natural Resources, (NYSE: ANR), Arch Coal, (NYSE: ACI) and Walter Energy, (NYSE: WLT) in way over-paying for transformative acquisitions last year. Peabody acquired PCI producer Macarthur Coal. Since then, PCI prices have fallen significantly and PCI's modest price discount to premium low-vol coking coal may never return to former levels. Next year, Peabody is transitioning away from contract mining to company-operated mines, another messy earnings year. This makes Peabody hard to invest in right now. Debt leverage is a bit high for Peabody as well.
Alpha Natural Resources: ANR is more than just a survivor, it's poised to emerge from the coal market downturn in pristine shape. ANR is the largest U.S. producer and exporter of coking coal and has the largest export capacity. Presumably lost upon investors is that roughly two-thirds of Alpha's coking coal is in the high quality, high margin, low-to-mid vol and high-vol "A" categories. Alpha has 1.5 billion tons of coking coal reserves. At benchmark coking coal prices of $250 per metric tonne, Alpha is a home run. With spot benchmark coking coal prices around $180 per tonne, no one wants to touch the stock. But, the price was $330 per tonne a year ago. ANR offers the best bang for one's buck among the higher risk names.
Arch Coal: Arch is the second largest producer in the U.S. after Peabody. Arch is heavily exposed to the Powder River Coal Basin, "PRB" in Wyoming. Spot prices for PRB coal are well below costs for ALL PRB producers. Next year's forward curve pricing is about even with industry costs. Not until 2014 is PRB coal comfortably in the money, but the price is nothing to get excited about as cost inflation eats away at the margins. Arch's savior is coking coal and exports. However, exports of PRB coal have ramped up far slower than expected and a major portion of Arch's coking coal production is still years off. Arch has the highest debt leverage of U.S. peers at near 6x next year's consensus EBITDA. I'm not a buyer of Arch at this time.
Walter Energy: Walter is the proud owner of deep, gassy mines in Alabama. The company has a history of production mishaps. Last year WLT over-paid for a high-cost coking coal producer in Canada that also had production problems. The combined company has a reserve life of less than 20 years. What's to like? At 7 million tons of low-to-mid vol coking coal in the U.S. alone, WLT is a top 3 global producer of premium hard coking coal. Recently, production problems have been minimal. Operating costs in the U.S. are inching lower, enabling WLT to earn $100 cash margins even at relatively low benchmark prices. Walter is a prime takeout target. Many global miners and steel companies have kicked Walter's tires over the years. Some may not agree, but I think Walter will be taken out by Rio Tinto, Vale, BHP or Anglo American next year.
Cloud Peak (NYSE: CLD): Cloud is a very good company. They are very well positioned as a low-cost producer in the PRB. However, they are 100% exposed to the PRB, and as mentioned above with respect to Arch, PRB prices through 2014 are not enough to make me want to buy Cloud Peak. To be clear, it's not an easy decision to pass on Cloud. If PRB pricing improves over the next year, as it likely will, Cloud stock could move up nicely. But, it's not sexy enough (zero coking coal, minimal exports) for investors to send it meaningfully higher than say Walter or Alpha in a coal market rally. Good company, probably a value trap compared to higher beta coal names.
There you go. If one is ready to dive into the coal names, I like (and own) Walter and Alpha of those described.
MockingJay2011 owns shares of Alpha Natural Resources and Walter Industries. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.