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Coal is probably our most abundant energy resource. We have provable reserves, within our own borders, equal to a quarter of the world’s reserves and more coal than any other country in the world. Coal generates approximately 50% of our electricity, more than any other energy source. Coal can meet our domestic energy for the next 100 years. Coal also costs a fraction of alternative sources of energy such as natural gas.

Clean coal is a reality today and not a futuristic goal. New coal plants today have greater than 90% removal for SO2, NOx and mercury. Emissions can be reduced to near zero levels. With this knowledge it is hard to understand why we maintain such dependence on imported oil for electricity generation in this country. Further, the vast sums expended on alternative, renewable energy have largely been failures. There are very real environmental issues and problems to be resolved in regard to coal mining and energy production. In some ways, it is easier to deal with the environmental problems of oil production when the problems are on the other side of the world.

Similarly, solar-generated electricity in quantities sufficient to fuel our economy is more a matter of theory than of fact. The major solar panel manufactures in China are exporting their products to the West at the time the Chinese government is increasing the importation of coal. Solar and wind power may someday contribute meaningfully to our energy needs at a reasonable, unsubsidized price but this will not occur for many years to come. As I write this article, I wonder if snow-covered solar panels are efficient and if they produce enough electricity to power my computer.

In the meantime, we present a number of coal mining companies worthy of consideration. Of this group, we favor Cloud Peak Energy (CLD). Cloud Peak Energy is a spin-off from Rio Tinto (RIO). The company is the third largest U.S. coal producer and a pure-play in the Powder River Basin mines in Wyoming and Montana.

Third quarter earnings came in higher than expectations due to strong demand. Production for 2011 seems about sold out and projections for 2012 and 2013 look good.

On metrics we think important, CLD appears to be undervalued. Cash return on invested capital is about 16.54%; EV to EBITDA is about 6X; EV/FCF is 6.6X and ROE is about 78%. The stock is trading down from the high end of its 52-week trading range.

Ticker

Company

Price

CFROI

EV/EBITDA

EV/FCF

EV/FCF to Sales Growth

ROE

Price 52W Range

AHGP

Alliance Holdings GP, L.P.

47.14

12.31

8.46

28.28

1.43

53.60

76.75

ARLP

Alliance Resource Partners, L.

64.96

n/a

n/a

n/a

n/a

55.10

81.99

ANR

Alpha Natural Resources, Inc.

55.22

8.47

10.95

20.32

0.27

4.00

64.41

ACI

Arch Coal, Inc.

31.61

6.97

15.41

24.40

1.27

5.30

71.91

CLD

Cloud Peak Energy Inc.

21.17

16.54

5.97

6.59

0.23

78.30

75.36

CNX

CONSOL Energy Inc.

50.23

0.42

15.61

435.90

41.12

13.20

78.77

ICO

International Coal Group, Inc.

8.25

5.71

19.29

27.58

27.58

1.30

73.42

JRCC

James River Coal Company

21.50

3.35

6.32

37.47

16.29

36.00

55.94

MEE

Massey Energy Company

52.71

-0.12

n/a

-1,391.71

-1,265.19

-4.20

82.34

NRP

Natural Resource Partners LP

33.88

8.25

16.57

25.99

2.92

14.20

83.49

PCX

Patriot Coal Corporation

23.18

-2.89

21.50

-44.98

12.85

-4.30

76.29

BTU

Peabody Energy Corporation

58.17

8.96

13.65

22.56

5.94

16.20

74.66

PVR

Penn Virginia Resource Partner

27.41

10.98

12.98

16.95

0.56

12.00

91.10

WLT

Walter Energy, Inc.

119.99

31.00

12.51

16.58

0.56

89.90

75.75

YZC

Yanzhou Coal Mining Co. (ADR)

29.91

-5.88

16.46

-35.24

1.75

33.20

78.30

Disclosure: The author has no position in any company mentioned in this article and will not take a position within 72 hours of publication.

Source: The Best in Coal: 15 Stocks Worth Considering