Coal Stocks No Bargain on January 2nd
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Coal Stocks Off to Lackluster Start to 2013
Despite a 2% rally in the overall market, most coal stocks are down 2%-3% on the first trading day of 2013. Alpha Natural Resources, (NYSE: ANR) was up 30% in December and Walter Energy, (NYSE: WLT) was up 19%. By contrast, I mentioned in a recent article that coal Master Limited Partnerships, "MLP" Natural Resource Partners and Alliance Resource Partners, (NASDAQ: ARLP) were down 2% and flat, respectively in December. [Notably NRP and Alliance are up 3%-4%]. I continue to think that NRP and Alliance are Buys. However, the rest of the bunch is fairly valued at best.
Coal companies face a difficult 2013. There is no clear evidence that 2013 will be any better than 2012. Only in 2014 is it possible for meaningful improvement. I see four main headwinds facing the coal producers.
Headwinds From 2012 to Continue Well Into 2013
First, coal fundamentals remain depressed. While it's reasonable to assume that fundamentals have bottomed, there has been little improvement in elevated coal stockpiles and coal prices. Natural gas prices are well off recent highs, down 4% today as I write, to $3.20 per MCF. December was a warm month in key coal-burning regions of the country, limiting the consumption of both coal and natural gas. Prices for premium hard coking coal, used in the process of making steel, have moved up modestly from lows of about $145 per metric tonne to $165 per tonne. However, I can assure you that no company can generate decent earnings at prices below $180 per tonne.
Walter Well Positioned For a Rebound, but When?
Walter is best positioned for a rebound in coking coal prices, but with the January-March, 2013 quarterly settlement coming in at $165 per tonne, a rebound above $180 is a 3Q-4Q 2013 event. Walter has done a good job at controlling costs in the U.S. and is growing production. Still, the company's Canadian operations remain plagued by high costs. In fact, all of the coal companies are suffering from higher per ton costs in 2013 as production cuts leave fewer tons to absorb fixed costs.
Second, coal company valuations are simply not cheap, (with the exception of Alliance Resource Partners). Even though the stock prices of many coal producers are down 50%-60% from 52-week highs, their earnings prospects for 2013 have cratered and debt balances are high. For example, Alpha has an Enterprise Value, "EV" [market cap - cash + debt] of $4.6 billion, of which $3 billion is debt! Consensus Earnings Before Interest, Taxes, Depreciation & Amortization, "EBITDA," for 2013 is $500 - $550 million. That means ANR is trading at an EV / EBITDA ratio of close to 9x. By contrast, Alliance Resource Partners is trading at about 5x, and other natural resource stocks, i.e. iron ore, E&P and gold, are trading in the 4x-6x range.
Third, coal prices may be capped at levels much lower than the peaks of 2011. In mid-2011, premium hard coking coal prices hit $330 per tonne, that's twice the current level. Looking forward, prices above $225-$250 per tonne will be hard to achieve because a lot of idled capacity can be brought back online. This is true for thermal coal prices as well. For example, in the Powder River Basin, "PRB," companies like Peabody Energy, (NYSE: BTU) have done a good job at keeping per ton costs in line even after cutting back production. However, upon the first sign of better pricing in the PRB, Peabody, Arch Coal, (NYSE: ACI) and Cloud Peak have tens of millions of tons that they can bring back online in a matter of months.
Foolish Bottom Line
Finally, coal has lost its luster in investors eyes. Without a good shot at substantially higher coal prices this year or next, the blue-sky potential for the sector is missing. With coking coal prices at $330 per tonne, Alpha, Walter and Peabody were printing money. Today, the coal stocks have less chance of really big returns, yet remain as volatile as ever. With 2013 essentially locked-in as another bad year, investors should look elsewhere. Unless coal stocks take another leg down, I think better value can be found in junior gold miner stocks. I expect to be writing more and more about gold this year.
MockingJay2011 owns shares of Alpha Natural Resources, Walter Industries, and Alliance Resource Partners, L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. 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!