3 Golden Crosses In Coal: Is An Industry Recovery Underway?

by: Investor RockieK


There is no denying that one of the worst hit industries in the United States has been coal. Without getting into the political or environmental arguments with respect to coal, one cannot overlook the dramatic impact and toll the collapse in the industry has had on workers and their families. (See here and here) You only have to drive through areas like Bland Virginia, Harlan Kentucky or Logan West Virginia to see the desperate straits coal mining communities now find themselves in. And, as much as I'd like to provide happy news to those weary souls, all I can say is that maybe, just MAYBE, there is some hope.

The Golden Cross

Technicians and traders often use moving averages to gauge the market's valuation of a stock apart from fundamentals. The current price compared to average prices over varying time frames gives the trader a sense of current sentiment, and some believe, insight into near term performance. Hence the trust placed in the well researched Golden Cross, where the short term moving average crosses above the long term moving average. (Go ahead and click the link. It's not a definition, but rather a research piece from analyst Derry Brown.)

Now, does it mean that if a stock experiences a golden cross that the company has turned a corner and is about to experience a new cycle of growth? No. Does it mean that the company is going to start hiring, start expanding, and start rewarding stakeholders with higher returns and salaries? No. There is a greater probability, but there is no guarantee that stock prices will continue to appreciate, and one must always look at the underlying fundamentals before investing in an individual stock.

That said, there have been a few golden crosses that have appeared in the coal sector over the past month or so. And, there are a few more coal companies whose charts appear poised to follow suit. This article will cover three of those companies, providing a brief review of operations, management commentary, and current outlook of the businesses.

Walter Energy (NYSE:WLT)

Walter Energy produces thermal coal, anthracite, metallurgical coke and coal bed methane gas. The main focus of the business is the production and export of metallurgical coal to the global steel industry, specifically to high-growth steel markets in Asia, South America and Europe.

The company started as a homebuilder in Tampa, Florida, back in 1946 by Jim Walter. Over time, Mr. Walter branched out into different businesses to become Jim Walter Corporation, and in 1972 developed four underground coal mines in the Blue Creek coal seam near Brookwood, Alabama. Today, Walter Energy has 15 mines in three countries and produced 11.7 million metric tons of coal with sales of $2.4 billion in 2012.

(From Walter Energy)Click to enlarge

During the last earnings report, CEO Walt Scheller had some positive things to say with respect to the company's outlook.

We are pleased with the progress we made in the third quarter in reducing costs, improving productivity and increasing met coal sales. We also continued to take proactive steps to strengthen our balance sheet and enhance our financial flexibility through a debt offering and related reduction of near-term debt maturities. Demand for our products has remained firm, and we have recently seen an improvement in met coal pricing. We look forward to improved financial performance in the fourth quarter and in 2014.

As such, met coal production has been expected to increase in the fourth quarter of 2013 as compared to the third quarter, however, we will need to wait for the next earnings report to see if this is realized. Walter Coal also expects its Wolverine mine to move into a more favorable phase in its mining cycle, and the company said that it remains on track to achieve full-year met coal production target of approximately 11 MMTs.

Market wise, the stock has a recent golden cross and is in a well defined uptrend with three higher highs and three higher lows since bottoming in July.

(Chart courtesy of StockCharts.comClick to enlarge

Alpha Natural Resources (ANR)

Alpha Natural Resources is the world's third largest metallurgical coal supplier, with the production capacity of nearly 126 million tons of steam and metallurgical coal. The company's steam coal is primarily purchased by large utilities and industrial customers as fuel for electricity generation and manufacturing, while its metallurgical coal is used in the steel making, primarily to make coke.

Overall, the company has approximately 150 active mines and 40 coal preparation plants located throughout Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming. It is also actively involved in the purchase and resale of coal mined by other companies, which in turn is blended with coal produced from its own mines to create customized products for customers.

(From Alpha Natural Resources)Click to enlarge

Just recently, Alpha Natural Resources filed an offering for 4.875% notes due 2020. The low coupon rate on these notes suggests a strengthening in the company financial and, if placed at or near par, would suggest market confidence in the company's outlook.

As with Walter, the CEO of Alpha Natural, Kevin Crutchfield had positive remarks to make during the last quarterly earnings report.

Although our third quarter results this quarter reflect the tough market environment and downtime at our Cumberland mine, we are encouraged that the metallurgical coal market appears to be gradually improving from its recent apparent low point, and domestic thermal coal inventories have trended down, planting the seeds for healthier market conditions in the future. Regardless, we are not standing still and we continued to make significant progress this quarter enhancing our competitiveness and flexibility by managing those aspects of our business within our direct control.

Although our third quarter results this quarter reflect the tough market environment and downtime at our Cumberland mine, we are encouraged that the metallurgical coal market appears to be gradually improving from its recent apparent low point, and domestic thermal coal inventories have trended down, planting the seeds for healthier market conditions in the future. Regardless, we are not standing still and we continued to make significant progress this quarter enhancing our competitiveness and flexibility by managing those aspects of our business within our direct control.

As part of the report, Alpha Natural said it expected to ship between 86 and 91 million tons during 2013, including 20 to 21 million tons of Eastern metallurgical coal, 28 to 30 million tons of Eastern steam coal, and 38 to 40 million tons of Western PRB coal. Although we will have to wait until the next quarterly earnings report to see if the company meet goals, as of October 18, 2013, the firm was at 96 percent of the midpoint of anticipated shipments. The company also introduced 2014 guidance, and said that it anticipated total 2014 coal shipments between 79 and 90 million tons, including between 18 and 22 million tons of metallurgical coal, between 24 and 28 million tons of Eastern steam coal, and between 37 and 40 million tons of Western PRB coal.

Market wise, the company stock had a golden cross right before December, and is also in a consistent uptrend with a series of higher highs and higher lows. However, the stock has yet to make an additional higher high or low since the golden cross.

(Chart courtesy of StockCharts.com)Click to enlarge

Peabody Energy (BTU)

Peabody Energy is the world's largest private-sector coal company. The company has approximately 9 billion tons of proven and probable coal reserves and owns, through its subsidiaries, majority interests in 28 coal operations located throughout all major U.S. coal-producing regions and in Australia. The company also claims to be the global leader in sustainable mining and clean coal solutions, and serves metallurgical and thermal coal customers in nearly 30 countries on six continents.

Peabody holds a leading position in the fastest-growing U.S. regions with its reserve base and liquidity. The company markets, brokers and trades coal in the world's fastest-growing economies through their trading and business offices in China, Australia, the United Kingdom, Singapore, Indonesia, Germany, Mongolia, India and the United States. This uniquely positions the company for success with access to the best global markets through its Australia platform, trading activities and Asia projects.

(From Peabody Energy)Click to enlarge

As with our previous two companies, the CEO of Peabody, Gregory Boyce had positive comments during the company's last quarterly report.

Peabody's third quarter results were led by significant cost reductions across all regions and higher Australian volumes. The Peabody team continues to drive operational excellence, structural cost improvements and capital discipline, and our well-positioned portfolio gives us substantial upside as markets improve.

Australia continues to widen its competitive advantage in the seaborne coal markets as inflation and exchange rates moderate, and a new government fosters policies to improve the competitive position of the resource sector. Metallurgical coal fundamentals are improving and continued build out of new generation is driving record thermal coal demand. Supply rationalization is continuing as higher cost mines in the U.S. and China close, and other exporting nations face increased domestic demand and rising costs.

The company had reported that coal demand had increased 35 million tons through September as a result of rising U.S. coal fleet utilization and gas-to-coal switching. Peabody also claimed improvement in inventories due to high generation levels and lower production, and cited its Southern Powder River Basin inventory levels as being 30 percent below its 2012 peak. The sticky wicket in the mix was a tentative settlement agreement with Patriot Coal and the United Mine Workers of America that could have an impact and full year 2013 or 2014 earnings.

As with Alpha Natural, Peabody Energy had a golden cross right before December, and had been in a consistent uptrend since bottoming in July. Similarly, The stock has failed to make a successive higher high, but has put in a higher low since then.

(Chart courtesy of StockCharts.com)Click to enlarge


Granted, these companies' stock charts have displayed a bullish pattern of a golden cross since bottoming out in July and August, and they have had the CEO's all make positive remarks with respect to industry outlook and individual company guidance. However, that does not mean that we are in the beginning of a coal recovery. Green shoots none the less, but the macro environment has yet to confirm.

But, if we are witnessing a strengthening of the coal market, and we are seeing the beginning of a share price rebound, retail investors could capture a lion's share of gains by taking positions now. Beware however, that speculative forecasting and bottom fishing are much higher risk than most retail investors are comfortable with. Nevertheless, I've nibbled will small a small position in Alpha Natural, and will be watching carefully as companies in this industry begin to report.

Hopefully, if this is the beginning of a recovery, we will see not only outsized returns for shareholders, but also a return of jobs to some of the hardest hit areas of Appalachia.

Disclosure: I am long ANR, . 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.

Additional disclosure: I may take additional positions in any of these stocks, their competitors, suppliers, or customers at any time.