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The Cheapest Energy Stock on Earth?

By Stansberry Research Interview Series
Monday, August 14, 2006

It’s not an oil stock... and it's not natural gas.
 
It’s coal.
 
From 1995-2003, coal prices didn't do much of anything. The only thing increasing coal producers' bottom lines was increased production. And the only way to increase production was to spend money digging more mines or through acquisitions.
 
A small coal company in Virginia, James River Coal (JRCC) chose the latter method. Between 1988 and 1999, the company acquired the rights to five mining complexes. The growth was great... but the underlying business was rotten. James River locked 80% of their coal production into below market, fixed rate contracts.
 
Due to the lost revenue and huge debt load used to finance the acquisitions, James River couldn't make the numbers work, and by May 2003, the company was filing for bankruptcy.
 
Having fired management and hired a number of turnaround specialists, James River was back on the Nasdaq at the beginning of 2005. The turnaround and the reserves (224 million tons worth $3.3 billion even at extremely conservative estimates) drew the attention of legendary hedge fund manager Phillip Falcone.
 
Falcone loaded up on $33 million worth of James River’s stock, roughly 5% of the shares outstanding. And sure enough, James River’s stock did... nothing, nada, zip. The company managed to increase its average coal prices, but continued to operate at a loss for the entirety of 2005. James River was possibly the only energy stock on the entire planet that was losing money during this time.
 
Fed up with the poor results, Falcone began to sell his stake in early 2006. Soon after, Pirate Capital, another investing firm with a 14% stake in the company, began lobbying for new company directors. Throughout this managerial fiasco James River’s share price tanked from $50 to $15... close to where it trades today.
 
One of Warren Buffett’s most famous pieces of financial advice was that investors should “invest in a business an idiot could run, because one day this will be true.” James River is precisely such a company. Coal mining is one of the oldest industries in the world, and yet James River’s management can’t seem to get the stuff out of the ground.
 
With Central Appalachian coal (where James River’s reserves are) trading at $64, the company’s 262 million tons of proven and probable coal reserves are worth over $16 billion. That’s more than 62 times its current market cap. The only coal company cheaper based on price to reserves is Massey, which recently closed one mine and is letting four others idle:
 
Name
Symbol
Market Cap
Reserves (tons)
Price to Reserves
Consol
CNX
$7 billion
1.4 billion
1/12
Peabody
BTU
$12 billion
9.8 billion
1/52
James River
JRCC
$256 million
262 million
1/65
Massey
MEE
$2 billion
2.3 billion
1/70
 
Either one of two things is going to happen:
 
1. James River is bought out by a larger company
2. Management eventually stages a successful rebound
 
It’s just a matter of time... bargains like this don't last for long.
 
Good investing,
 
Graham




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Market Notes
Top Performing ETFs in 2006:
Internet Infrastructure (+ 27%) iShares China 25 Index (+ 25%) streetTRACKS Gold (+ 18.7%) iShares COMEX Gold (+ 18.3%) iShares Dow Transports (+ 17.6%)
 
Worst Performing ETFs in 2006:
Internet (- 19%) Biotech (- 12%) Semiconductor (- 10%) Broadband (- 19%) iShares Treasury Bond (- 7%)
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%