On Monday, July 15, Alpha Natural Resources, Inc. (ANR) announced that its subsidiary, Cumberland Coal Resources, LP has temporarily halted production at a Greene County, PA mine due to "adverse geological conditions in the mine's head-gate area". Cumberland's management noted that "it would be several weeks, if not months, before production continues". In the wake of today's disappointing news I wanted to not only examine the company's recent performance, but also take a look at several key catalysts fueling my decision to consider a long-term position in the company.
Performance and Trend Status
On Monday, shares of Alpha Natural Resources, which currently possess a market cap of $1.23 billion and have fallen about 43% YTD, settled at $5.56. Based on Monday's closing price, shares of Alpha Natural Resources are trading 2.94% above their 20-day simple moving average, 11.13% below their 50-day simple moving average, and 28.60% below their 200-day simple moving average. These numbers indicate a near-term uptrend and both a mid-term and long-term downtrend for the stock, which generally translates into a selling mode for most traders.
The Appalachian Coal Conundrum
It's certainly no myth that the coal businesses and mining projects located in eastern Kentucky and southern West Virginia are seeing their coal reserves dwindle and costs go through the roof. According to a report by Downstream Industries, "Government data shows that production in Central Appalachia is projected to fall from 185 million tons in 2011 to 128 million tons by 2020, a 31 percent drop. Along with eastern Kentucky and southern West Virginia, the region also includes lower producing mines in both Tennessee and Virginia".
Given the fact that Appalachian reserves are declining and production over the next 6-10 years is minimal at best, U.S.-based companies such as Alpha Natural Resources will need somewhere to turn. In my opinion that somewhere happens to be China and the long-term prospects seem much more attractive than they are here in the U.S.
China Could Be Alpha Natural's Saving Grace
Not only does China heavily rely on coal, it also imports a significant amount of it from U.S.-based coal producers such as Alpha Natural Resources and Peabody Energy (NYSE:BTU). According to a recent article by Ken Silverstein, "China is trying to build a stable generation base comprised of nuclear, coal and green facilities. That, of course, takes money. To achieve that objective, policymakers know they must restructure their electricity sector to make it more attractive to outside investors that require adequate returns". If China can successfully restructure its electricity sector, and maintain its strong demand for coal, not only will names like Alpha Natural Resources and Peabody Energy see a significant upswing, but the entire sector could experience significant prosperity over the next 12 months.
How can China continue to enhance the stable foundation it already has in place? It can continue to import and increase the estimated 3 billion tons of coal that come into the country each and every year. If we consider the fact a sizable portion of that comes from Alpha and Peabody, I strongly believe shares of both companies could see a boost over the next 12-18 months. Although investors need keep a watchful eye on countries like Australia (which has seen its coal production reach near-maximum levels), U.S.-based coal headed for China could in fact rise beyond the current level of 3 billion tons, if a number of other countries are reach maximum capacity.
When it comes to those who may be looking to establish a position in Alpha Natural Resources, I'd continue to keep a watchful eye on the company's overall production in the next 12-24 months, as well as any growth directly related to Chinese-based imports that could have a direct effect on the company's performance over the year or two.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ANR, BTU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.