Friday, May 14, 2010

Is Coal Capable of a Comeback?

As fellow Seeking Alpha blogger Gregor pointed out, coal is making a comeback to prime time, even in the developing world. This triggered my thoughts as to a “Eureka moment.” This is what I like about the internet - myriad points of view - a few which might cause an internal reaction in my own thought patterns and that I can apply.

Coal comes in many forms but has two main economic usages, thermal as in burning for energy requirements, and metallurgical as a key ingredient for steel. The recovering economy is increasing the demand for thermal coal domestically, whereas in metallurgical coal, the strong steel demand requirements are from structural requirements in the emerging economies.

As the old saw goes, “the trend is your friend,” implies that it is infinitely easier to get on board and enjoy the ride than trying to time the reversal of a trend. The thought is not about an opportunity in a trend reversal but a continuation of a trend that has much more to come.

Taking a look at a Thermal Coal price chart below, one can definitely see the trend upwards.

Putting this information to use in investing, the author pored and labored over internal and external memory banks to retrieve some possible and practical suspects. A few that come to the fore are a mixed bag and are listed following. They are each operating under differing circumstances and should be entered with a different strategy.

Cliffs Natural Resouces (CLF) is a Cleveland based supplier of iron ore and coal to US and Asian markets. CLF has mines in North America and Australia. CLF has enjoyed a tripling in share price from Spring 2009. The author believes only good news lies ahead for CLF, but the stock has also enjoyed a phenomenal run, and so this stock should be entered only if you believe in further growth and then only on pullbacks, such as presently.

Western Coal Corporation (WTNCF.PK) is a British Columbia based miner of metallurgical coal. This stock is a play on Asian economic growth and the rising demand for the premium priced metallurgical coal that they produce.

Massey Energy (MEE) is the large cap coal miner that recently sold off due to miner deaths at an explosion at their Upper Big Branch facility in West Virginia. This stock has dropped primarily due to the negative publicity and should have an extra oomph to their share price as the American economy chugs back to normal operations. The other main factor to consider for MEE is the recent consummation of their takeover of private Cumberland Resources which now positions MEE strongly as a higher value metallurgical coal supplier also.

Cloud Peak Energy (CLD) is a low cost Powder River Basin supplier of thermal coal for power utilities. This stock was a recent spin-out from Rio Tinto (RTP), and has not yet been recognized by the investing public or major institutions. This stock then is a play on the American recovery and increased electrical demands.

Market Vectors Coal ETF (KOL) is a relatively small cap ETF based upon coal miners. If you believe in the premise of a re-surge in coal, but do not want the complexities of individual companies, there is always KOL.

Disclosure: No positions

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