On February 12, The Wall Street Transcript interviewed Justin Bergner, a Research Analyst with Gabelli & Company, Inc., covering natural resource companies with a focus on coal and base metal mining. Key excerpts with his favorite stock pick follow:
TWST: What name should investors look at?
Mr. Bergner: Foundation Coal (NYSE:FCL) is our favorite pick. Foundation Coal mines 50 million tons out of the Powder River Basin, about 14 million tons out of Northern Appalachia and about 9 million tons in Central Appalachia. What makes Foundation Coal very attractive is that the company trades very cheaply. They trade about 6.5 times our 2007 EBITDA estimate of about $335 million, and we think the company could be worth in excess of $50 per share in three years, and in excess of $40 per share a year from now.
The reason we like Foundation is because the company has a conservative management that is generating cash from their assets and using that cash to pay off debt. We like the fact that Foundation has a very heavy contracted position for their coal production in 2007-2008, which dramatically limits downside, and we like the fact that long term, the company has a favorable position as a core supplier in the Powder River Basin, which could ultimately make them an interesting takeover candidate. We wonder why Foundation has pulled back to the degree it has, given that its 2007 and 2008 production is so heavily contracted. It has much more certainty in its ability to generate earnings and cash over the next two years than most other coal companies.
TWST: Is there some area of concern that brought the stock back in?
Mr. Bergner: The stock has come down along with the stocks of other coal companies as prices have declined in the spot market and for new contracts. The stock, which now trades at a little over $32 per share, has traded at a discount relative to its peers for some time. We think part of that discount has to do with the fact that many investors want to buy coal stocks that are very focused on a particular coal basin, and Foundation Coal is exactly the opposite. Despite only having a $1.5 billion market cap, Foundation Coal is quite diversified across regions, with production in the Powder River Basin, Northern Appalachia and Central Appalachia, with each of those regions contributing a fair amount of the company's value. We think that over time, investors may shift away from wanting to prioritize coal stocks based on particular production basins, and at that point, the value of Foundation will be realized in the marketplace.
TWST: In regard to Foundation, you mentioned a possible takeover. Has there been much M&A activity in the space?
Mr. Bergner: Over the last two years, there have been a number of small transactions in the coal space, but very few large transactions. We have seen a couple of small transactions in Central Appalachia, the most significant of which was Alpha Natural Resources (ANR) acquiring the Nicewonder coal operation, but we haven't seen a lot of M&A activity at present. So when we talk about a takeover possibility for Foundation, we're thinking more long term, not necessarily in the next three to six months.