National Coal Corporation (NASDAQ:NCOC) is the smallest publicly traded coal company in the U.S. It began operations in 2003. The company mines and sells coal in the Central Appalachian markets [CAPP]. In October, National acquired Mann Steel (a coal mining company), which expanded production by 50%. NCOC has two underground mines, five surface mines, two highwall mines, four prep plants, and four train facilities. In 2008, the company will produce between 2.5M and 3M tons of coal. This coal should sell for an average price in the mid $50s with an average cost/ton in the mid $40s.
NCOC sells most of its production to electric utility customers. The largest customers are South Carolina Public Service Authority, Georgia Power and Duke Power.
The CEO is a former analyst from Merrill Lynch; he signed on in 2006 and has purchased stock in the company at levels above the current market price. Earnings are currently depressed because the weakness in the coal markets in 2007 prevented the new CEO from ramping up operations, implementing his growth strategy, and consummating acquisitions as planned. All this is now behind the company. Earnings are low, but poised to rise dramatically in 2008 and 2009.
The coal markets are improving, and appear set to improve steadily from here. Large cap coal stocks have appreciated, but this small cap play has yet to catch up. National Coal has no analyst coverage and limited (but improving liquidity). Investors looking for a way to get involved in the coal space should "discover" this stock during 2008.
The valuation is cheap, and does not account for the enormous investments made over the past few years. If the business can generate its prior margins, the stock is undervalued by 50%.
National Coal deserves a close look. On 2008E, the stock is trading at 7x EV/EBITDA and 15x. On 2009E, the stock is trading at 4x EV/EBITDA and 10x P/E.
Disclosure: Author has a long position in NCOC