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Summary

  • Most coal mining companies have posted abysmal returns over the past three years.
  • Industry outlook is threatened by potential carbon taxes and other environmental legislation.
  • Forward looking opportunities seem scarce.

In April of 2011, I wrote an article on coal miners and tried to identify some investment options. My suggested short positions did quite well, a few of my longs were also okay, but several longs would have resulted in losses. The following table summarizes the simple total returns from all companies reviewed:

TickerNameApril 21, 2011 CloseIntermediate DividendsJune 20, 2014 CloseSimple Total Return
WLBWestmoreland Coal Company17.050.0036.66115.0%
SPYS&P 500 Trust ETF133.7810.24195.9454.1%
AHGPAlliance Holdings GP, L.P.50.609.2462.6942.2%
ICOInternational Coal Group, Inc.10.87Assumed no intermediate dividendCash Acquisition of $14.60 by Arch Announced in May 201134.3%
VAWVanguard Materials ETF88.315.05111.6432.1%
ARLPAlliance Resource Partners, L.P.38.243.4845.1327.1%
PVRPenn Virginia Resource Partners LP27.91 Merged in Regency Energy Partners (NYSE:RGP)12.9%
IYMiShares Dow Jones US Basic Materials Sector Index Fund82.714.2987.7811.3%
CLDCloud Peak Energy Inc19.940.0019.55-2.0%
CNXCONSOL Energy Inc.51.261.4547.25-5.0%
RNORhino Resource Partners LP25.165.4713.73-23.7%
NRPNatural Resource Partners LP34.126.7315.65-34.4%
XMESPDR S&P Metals & Mining ETF74.041.8141.78-41.1%
BTUPeabody Energy Corporation66.021.1116.95-72.7%
MEEMassey Energy Company66.81Assumed no intermediate dividendAcquired by ANR at 69.33 with $10 cash and 1.025 shares of ANR-83.5%
OXFOxford Resource Partners, LP26.152.831.00-85.4%
ACIArch Coal, Inc.34.640.663.66-87.5%
ANRAlpha Natural Resources, inc.57.080.003.75-93.4%
LLENL&L Energy, Inc.7.280.000.37-94.9%
WLTWalter Energy, Inc.136.381.175.5-95.1%
JRCCJames River Coal Company22.77Assumed no intermediate dividend0.25-98.9%
PCXPatriot Coal Corporation26.09Assumed no intermediate dividend0.00-100.0%

Source: Yahoo!Finance, company websites, author calculations and analysis.

It is quite clear that several of these companies have delivered horrible performances. Both Patriot Coal Corp. (OTCQB:PCXCQ) and James River Coal Company (OTCPK:JRCCQ) have filed for Chapter 11 bankruptcy. Six other companies have delivered total returns of less than 80% declines. With the exception of Westmoreland Coal Company, every company has underperformed the S&P 500 as measured by the SPDR S&P 500 Trust ETF (NYSEARCA:SPY). Most of the companies have also underperformed basic materials ETFs including Vanguard Materials ETF (NYSEARCA:VAW) and iShares Dow Jones US Basic Materials Sector Index Fund (NYSEARCA:IYM). The exceptions have been companies that got acquired (for cash or by broader energy companies) and two smaller scale partnerships. Massey Energy Company was acquired by Alpha Natural Resources, inc. which did not help its situation.

The following table summarizes the results of recommendations which lost 11% of the total value. Without question that is a bad result, but it is at least substantially better than the result of going long all these companies, which would have resulted in a loss of about 50%.

Recommended TickerRecommendationResultGain on $1000 investmentPercent gain
CLDLongNeutral(20)-2%
ACILongBad(875)-88%
BTULongBad(727)-73%
JRCCLongBad(989)-99%
MEEShortGood79279%
PCXShortGood1,000100%
AHGPDividend longsGood42242%
ARLPDividend longsGood27127%
OXFDividend longsBad(854)-85%
Total (979)-11%

Source: Yahoo!Finance, author calculation. Gain on $1000 assumes $1000 was committed to the position April 21, 2011 and measures the gain or loss to June 20, 2014.

Coal outlook continues to be strained

The outlook for coal is not good in the electric power industry, as it continues to fall out of favor due to less expensive natural gas and increasing use of renewables. The following table shows the recent historical production of electricity by source for utilities.

(click to enlarge)

Source: EIA, author calculations *Renewables includes solar, wind, wood and wood derived products, conventional hydroelectric, geothermal, and other biomass.

With the ever present challenge of climate legislation and various other environment initiatives, I would expect this trend to continue for the near future. Furthermore, with recent announcements that China is pushing hard to get solar to be at cost parity with coal, coal's place in electric production is further challenged and only secured by the presence of existing coal plants. Over time, that position will erode as plants are retired.

Coal is also used in steel manufacturing, commonly referred to as metallurgical coal. Lignite and Sub-bituminous coal are typically only used in power generation due to their lower heat content. However, they typically also have higher levels of impurities. Next is bituminous coal which is also often used in power generation, but can also have some other industrial applications. The highest quality coal is anthracite. It has the highest heat content and the lowest level of impurities. It can be used in both power and metallurgical applications, as well as some chemical applications, as a reducing agent and for local heat generation. However, its high price typically makes power generation a less economic application. Still, US steel production in 2013 was approximately 87 million tonnes, which is down from the 90-100 million tonnes posted annually through the late 1990s and until 2008. The upside is that global steel production is generally driven by emerging markets.

Can technology save coal?

Given these facts and the recent trends in the industry, the outlook for coal is pretty bleak. However, if Internal Gasification Combined Cycle (IGCC) technology can be made cost effective in combination with Carbon Capture and Sequestration technologies, coal could once again increase its share in the electric power sector. IGCC is a process in which a synthetic gas is produced from the coal. The advantage in IGCC is that the emissions are produced in a highly concentrated stream during the gasification process, instead of in a diffuse stream out of the smoke stack in a traditional coal power plant.

Looking forward

The first thing to note is that not all companies performed poorly. Alliance Holdings GP, L.P. and Alliance Resource Partners, L.P. posted decent returns. Cloud Peak Energy Inc which mines sub-bituminous thermal coal in Wyoming and Montana was essentially breakeven over the time period. WLB has gone from a $223 million market capitalization to $552 million. Furthermore, they too are a lignite and sub-bituminous thermal coal miner with mines in Texas, Wyoming, Montana, and North Dakota. Clearly it was possible to make money in the industry without even being diversified. These companies could be revisited as potential investment opportunities. Will WLB's acquisition of Sherritt International Corp. pay dividends or will it be more akin to ANR's acquisition of Massey Energy? While the electric industry is slowly shifting away from coal, it still represents over 40% of the produced power - someone is supplying that coal.

Disclosure: The author is long SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.