Wednesday, April 23, 2014
Is anyone making money in coal right now?
The answer could help contrarian speculators make a fortune over the next few years...
Coal is probably the most hated fuel in the U.S. today... It's dirty and old-fashioned. Many folks are worried U.S. politicians will put coal-fired power plants out of business. And abundant natural gas supplies have pushed coal demand down over the past few years.
You see, natural gas is a direct competitor with coal as a fuel for electric power. And natural gas is cheap at less than $5 per thousand cubic feet today. This has spurred a massive switch from coal to natural gas. As demand for coal dropped, so did its price. The price collapsed from $118 per ton (for eastern U.S. coal) in 2008 to around $60 per ton today.
Lower demand and prices have been tough for coal producers. Many are exiting the business.
Consol Energy recently sold five of its coal mines. It will now focus on natural gas exploration and production.
Meanwhile, James River Coal, Patriot Coal, Trinity Coal, and America West Resources have all filed for bankruptcy.
But this is exactly what contrarian speculators like to see.
You see, natural resources like coal are tremendously cyclical. That means their prices move in waves. They go through big booms and busts. The best time to invest in natural resources is when everyone hates them.
After the market leaves a natural resource for dead, things often get better. Production drops to meet lowered demand. Eventually, demand picks up... causing prices to boom.
And contrary to what most folks think, coal isn't going out of style. As my colleague Matt Badiali showed you earlier this year, the world is still consuming huge amounts of the stuff.
That's why I like owning the beaten-down coal sector. But you have to be careful. If you buy companies that can't stop bleeding cash, you'll lose. If you buy companies that can still produce profits while prices are low, you can wait out the bad times and make big money.
So which coal companies are still making money?
To answer this, I searched for U.S. coal companies that are growing cash flow. The companies in the table below increased cash flow from operations last year. This is cash left over after paying normal operating expenses. They also earned enough cash to pay capital expenditures, or "cap-ex" (funds used to buy or upgrade assets like property, buildings, or equipment), dividends, and interest:
Of these, Alliance and Westmoreland also generated higher EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2013 than the year before.
I recommend digging deeper into these companies if you're looking to invest in coal today.
They have the cash flow to weather the storm. And they may be big beneficiaries of the next boom in coal.
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