By Amine Bouchentouf
Often neglected by investors, coal’s prospects for growth are strong as the industry works to shed its environmental reputation.
While a critical part of the energy industrial complex, coal is often neglected and receives less attention from international investors than its crude oil and natural gas counterparts. Part of the reason may be the fact that coal has a reputation for being an especially environmentally unfriendly commodity. There are many instances where coal mining has indeed proved to be hazardous, but the industry is an indispensable piece of the global economy and has taken many steps to mitigate those environmental issues.
The Saudi Arabia Of Coal
Coal is a fossil fuel that’s used primarily to produce heat and electricity. A majority of coal is consumed by power plants that use it as a feedstock to generate electricity, which is then distributed to commercial, residential and industrial consumers. As an integral part of every major economy, coal cannot be ignored by the serious investor.
Unlike oil or natural gas, the world’s global coal reserves are not located in the Middle East: You may be surprised to find out that the United States holds the largest coal reserves in the world, with more than 22 percent of global reserves. In fact, the U.S. is the Saudi Arabia of coal.
Other important coal countries include Russia, China, Australia, and India. This is significant because it offers investors a wider variety of companies to achieve exposure to coal.
In 2011, more than 7,000 megatons of coal were consumed globally, representing a 7 percent increase year-over-year. This trend is expected to continue. Many of the world’s emerging economies opt for coal because it is relatively cheaper to produce and commercialize. China, which boasts the world’s third-largest coal reserves, is such a heavy consumer of coal that it must now import large amounts to keep its industrial program. It is not uncommon for ships containing coal from neighboring Australia to wait several days in a queue at the ports before unloading their cargo.
Many economists believe that coal consumption may double by 2050, as China, India, Russia, and other fast-growing economies continue on their current growth path. In addition, technological developments are helping find new uses for coal every year, on top of its mainstay uses in steelmaking and manufacturing. New mining techniques are also helping make coal mining become more environmentally friendly and safer for miners and their communities.
Investing In Coal
Despite the environmental concerns — which are being addressed and resolved on a regular basis — it’s advisable for any serious investor to have at least some exposure to this important global commodity. The most straightforward and efficient way to get exposure to coal is through the equity markets. Fortunately, there are several world-class coal companies you can choose from.
Investors should include at least one U.S.-based coal company since the country is the world’s largest coal market. One such company I recommend is St. Louis-based Arch Coal (NYSE: ACI), which is the country’s fourth-largest company and holds almost 15 percent of the coal reserves in the United States.
Arch Coal operates about 50 mines across the U.S., with a majority of its operations located in the prolific coal basin that includes West Virginia, Kentucky, and Maryland. Arch is also a fairly well-managed company, with net profit margins of more than a 5 percent threshold and a return on equity of 8 percent, which are excellent numbers for a capital-intensive mining company.
Another single well-managed company for your coal exposure you can’t go wrong with is Peabody Energy (NYSE: BTU), which is also based in St. Louis. Not only is Peabody the largest coal company on the continental United States, but it also has significant operations in other key coal countries such as Australia and Venezuela. With revenues in the $10 billion range and operating margins of 21 percent, Peabody is a must-own stock for any investor seeking global exposure to the coal industry.
This also may be a good time to pick up coal stocks since they are currently trading at deeply discounted prices, as a result of the global economic slowdown and depressed natural gas prices. Peabody, for example, is currently trading at 55 percent of book value, a historical low for a very well-managed company.
Disclosure: The author doesn’t have any positions in the stocks mentioned.