Analyzing Three Metallurgical Coal Companies

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Coal generation in the United States was low all throughout the 2012 due to pricing pressure and weak global demand. Weak Chinese economy and cheaper natural gas prices have led down the demand for coal. However, for the coming years I anticipate this scenario to change with the rise in the metallurgical (met) coal demand from BRIC economies. India's met coal demand is expected to increase 25% till 2015 as DRI production which has provided pig iron is now taken over by blast furnace production. Also, China should see rampant increase in its industrial production and investment rebound from import as the economy eases. Today, I am taking into my analysis three stocks which draw larger portion of their revenue from met coal – Walter Energy, Peabody Energy and Teck Resources. I have a favorable view on two of them - Walter and Teck Resources. Let’s see their movement in last one year below.


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Source: Yahoo Finance

Peabody Energy Corp (NYSE: BTU): Though global challenges weigh heavy on the revenue and production levels of Peabody's 3Q12, but its cost cutting efforts bode well and it was able to generate operating cash flows of $600 million. On the other hand, for 1Q 2013, Peabody itself is not certain of the global demand scenario and is cutting its earnings forecasts which will weigh higher on its stock and benefit its rivals’ shares prices. Peabody is lowering its capex for 2013 by 50% due to weak sales and weaker coal prices. It has discontinued operations in its Air Quality Mine at Vincennes, Indiana in September 2012.

Walter Energy (NYSE: WLT): Walter Energy, like all coal miners has also designed its plans to remain stable in production and revenue growth keeping in accordance with the global coal distress. In the near to medium term, Walter has plans to cut capex and reduce production levels due to weak coal markets. It will reduce production at two of its Canadian mines having two weeks of downtime during 4Q12 due to lower down inventory levels. But Walter will continue to develop a new 2.5-3.5 million metric ton/year Blue Creek mine in reserves located to the northwest of Mine No. 7 and Mine No. 4, though with lower spending. I am having a favorable take on this stock, because of the following reasons:

  1. Acquisition of Western Coal: The April 2011 acquisition of Western Coal by the company for $3.7 billion adds significant opportunity into scope and market expansion. The combined power creates a pure-play global metallurgical coal producer with greater diversification and access to met coal markets and customers in Europe and South America. With this acquisition, Walter now mines coal in the US, Canada and the UK. This deal will potentially benefit from the increased steel production from BRIC economies. Along with other initiatives the total production of Walter is estimated at 11.2 million.
  2. Mine Number 4 & 7:  Walter is growing its production profile organically through expansions at Mine #7. Both Mine No. 4 and Mine No. 7 at Alabama have been among the most consistent mines over the last three decades in the United States. Each mine averages 2.2 million metric tons/year. The No.7 mine contributes about 37% of metallurgical coal production volumes for 2012. For the coming 2013-2014 the production level at Mine No. 7 will remain stable at 4.5 million mt/year (as a two-longwall operation) and Mine No. 4 will have levels at 2.0 million mt/year from its single longwall operation.
  3. Southern Appalachia: Walter will also benefit from its Southern Appalachia mine to have minimal cash costs around $100/ton. The mine is located near the ports and has its rail transportation cost lower at $16/ton than Capp producers that pay up to $45/ton.

Teck Resources (NYSE: TCK). It has acquired SilverBirch Energy which will give boost to its Frontier project. This project is expected to produce 277,000 barrels per day throughout its lifetime. Though the project may take time to be operational but it also signifies the management's move to have growing revenues for the long haul. Besides this, Teck has well accomplished its targeted increase in mining capacity to 28 million tons per year through expansions in varying projects. Its Greehills and Elkview mines have achieved the capacity level of 5.0 million tons per year and 6.6 million tons per year respectively. The above two plans details the company’s well defined strategies into coal and oil sands business.

In conclusion, I think both Walter Energy and Teck Resources will benefit with the potential recovery in export demand for steel making raw materials in 2013. Even though both of them are lowering their capex for the next one year but side by side they are also increasing their production levels. Coming to Peabody, I think its lower forecasts will hurt its stock and revenue in the longer run. 



ShwetaDubey has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own

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