Undiscovered American High Quality Coal Producer Poised to Rise

May.24.11 | About: Xinergy Ltd. (XRGYQ)

After seeing how a powerful March 11 earthquake set off a massive tsunami that seriously damaged nuclear power plants in Japan, environmentalists and political activists alike are up in arms questioning where utility companies should go next to quench the growing thirst of power starved world markets.

For better or worse, the recent events in Japan- amplified by weeks of coverage on 24-hour television networks and news wires- called new attention to the need for better energy sources.

"This is no longer the 1950s. This is 2011," said one protestor who recently spoke out against utility titan Duke Energy (NYSE:DUK), complaining that new technologies exist that are more environmentally friendly- including solar and wind power.

Duke Energy Corporation owns and operates both regulated and unregulated power plants across multiple states in North America and in multiple countries in Latin America. It's their business to know where the industry is moving and while the company has spent money on developing innovative renewable energy solutions, including wind, solar and biopower projects in the U.S., the utility giant has been criticized for continuing to build coal-fired plants and moving ahead with new nuclear plant projects despite the concerns highlighted by the Fukushima story in Japan.

While many might be happier if the utilities moved heavily towards renewable energy, experts will tell you that even the best wind and solar power solutions are not immune to problems and that they require back up from coal or nuclear plants.

Even as Wall Street speculators continue scramble and find the latest green energy solutions promised by "game changers" and "radical technologies," smart investors know that as all the banter and debate play out, utility companies will continue to need sources like coal for years to come. It isn't that they are turning their attention away from green energy options, it's that traditional thermal generation isn't going to be replaced any time soon.

The industry is building new coal and natural gas fired plants that reduce pollution and moving forward with plans to build new nuclear plants using newer designs that operate water-free and preclude explosions.

Instead of seeking refuge in highly speculative energy of the future plays, value-driven investors may want to seek refuge in undervalued energy plays.

Companies like Xinergy Ltd., which is listed in both Canadian and American exchanges (XRGYF.PK), is a U.S. Central Appalachian producer of high quality coal has been capturing more attention and rumors have it well on the way to an up-listing on a U.S. big board. Funds and institutions are starting to become more aware of the company given its recent expansion and are sending in analysts for a closer look in hopes of positioning themselves. There are a growing number of reasons the stock is starting to attract more attention.

As reported on Friday, rising overseas demand for two coal types produced in Appalachia will likely boost mine operators' profits in the coming quarters.

India and Europe will likely to import more of the plentiful, dirtier-burning coal used by electric plants, Brean Murray Carret & Co. analyst Jeremy Sussman said in a research note Friday. Sales to those markets will likely offset slower demand growth for so-called thermal coal in the U.S. and from China, he said. Even China is mining more of its own reserves.

That begs the question: "Why hasn't the American company, which began trading publicly in 2010 on the Toronto exchange caught on more quickly than it has in the U.S?"

"The Canadian markets were looking," explains Chris Halouma, a spokesman for the company. "They were hungry for a coal story, an energy story because they saw it was on the horizon. The Canadian market had more mining companies, they understood the resource sector. There are more mining companies on the Toronto Stock Exchange than the EMX, New York Stock Exchange, and NASDAQ combined so we went out there first.

But while Canadians may understand the value of metallurgical coal, they haven't yet appeared to grasp the thermal part of the equation and a big part of Xinergy's focus. Does that explain the lower than expected price per share and "undiscovered" status?

Investors need only look at James River Coal Company (JRCC)- which has seen gains of over 29% during the past year- and International Coal Group (NYSE:ICO)- which traded from $1.24 in 2009 and is now being acquired by Arch Coal for $14.60 per share in cash to see not only the possibilities here.

When one considers the structure of the company and the fact that there is not a lot of float in the stock, things get even more interesting. Founder, Chairman and Chief Executive Officer John Nix is heavily invested with his own "skin in the game." Nix owns roughly 44% of the company while his family owns another 4%. Nix must be looking forward to 2012 when some of the company's expenses start to bring in more revenue and pay dividends.

Let's forget possibilities for a moment. The reality is that Xinergy appears to be undervalued based on a forward looking EBITDA.

Despite having contracts with big electric utility companies in the southeastern United States for their thermal product, Xinergy has also been moving into developing the metallurgical coal side of their business. The company recently got UBS to finance $200 million worth of eight-year notes which it will use to develop two recently acquired properties: Greenbrier metallurgical and Brier Creek thermal coal reserves.

"Right now, we've given guidance that we'll produce 2.8 to 3 million tons of thermal coal this year," says Halouma. "In 2012, that number is going to be 3.5 to 4 million tons. On the metallurgical side, we think we can do 50,000 tons per month, which is 600,000 tons on an annualized basis of metallurgical coal."

Friday's report that spiking prices for the hot-burning metallurgical coal used to make steel are likely to boost profits even more, as developing nations use up the metal to expand their infrastructures only adds to the possibility that Xinergy and others are poised shake-up their market valuation.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XRGYF.PK over the next 72 hours.