Patriot Coal (PCX) went against my bet. It filed for a bankruptcy on July 9th. The bankruptcy came so soon it surprised even the bears. I took a heavy loss and a lot of egg yolk thrown on my face, as people flocked to comment on my article.
Most people thought that given Patriot's financial shape, it might go bankrupt. But the consensus was that a bankruptcy would not come so soon. The bears counted on an eventual bankruptcy. The bulls counted on the coal sector to turn around soon enough to save PCX.
The sudden bankruptcy of PCX plunged the entire coal sector into deep panic. James River Coal (JRCC), widely perceived to be the second in line to go down, lost nearly 25% on July 10th.
People felt that if PCX could file for bankruptcy so sudden, who was to say that JRCC would not decide to file tomorrow? Maybe Arch Coal (ACI) could be the next. And then one by one all coal mining companies would want to file for bankruptcy, right?
The suddenness of Patriot's bankruptcy gave the impression that the management did not consider a bankruptcy as a death sentence. Rather they might consider it as a re-birth, something to be celebrated. PCX shareholders like me felt betrayed. Had PCX tried all options before the bankruptcy filing? I felt they had not tried.
This is what makes a lot of shareholders in other coal companies feel scared. If managements do not consider a bankruptcy as something to be avoided at all cost, but rather something welcomed, then why should investors have confidence holding their shares?
I felt that the fear is understandable, but not rational. I believe most company executives do not want a bankruptcy. They will do their best to survive and wait for the coal sector to turn around. Especially JRCC. They have been through a bankruptcy nine years ago. They have learned the lessons. They know how to navigate through difficult times like today.
More over there are clear signs of an ongoing coal price rally that seems to be ignored by the general market. See the charts below:
Today, the CAPP coal prices were up more than $1/ton:
No one is correct 100% of the time. I took a bet that I thought had a better chance of winning than losing. It turned out to be a bad bet. The loss is painful to me. I am down, but not out!
From my experience, the biggest risk to me was not loss of money, but loss of opportunities. Every one had lost money before. The lost money can be made back. But if you lose an excellent investment opportunity, it is very hard to find something else to replace your loss. That's just my take. I understand other investors may put risk avoidance ahead of opportunity seeking. Carl Icahn is known to be a big risk taker and he had been very successful. There are other successful investors with much less taste for risks as well. When calculating potential gains and losses, you have to gauge your own tolerance of risks.
I believe today is the darkest coal moment right before the dawn of a super coal bull cycle. Here are a few points why that is the case:
- CAPP coal prices have been rising for a month as shown in the first chart. I believe big institutions must have analysts who study data like this. But the retail investors who never bother to check the data remain uninformed so far. Based on recent coal price rally, analysts might issuing bullish calls soon.
- Based on my analysis of the data, coal stockpile in the power sector saw a large drop of 20M tons from May to June 2012. The official data will be published by early September. But some one doing the DD already knows it. The number will change the market sentiment in coal once people know it. I will explain it below. I will post a separate article on how I got the numbers.
- One bearish sentiment people have in coal was the perception that the dirty coal is being replaced by cheap and abundant natural gas. This myth is being debunked. People are beginning to learn that natural gas is neither cheap nor abundant. I will post an article on US shale gas resources soon.
I estimated that the US coal stockpile in the power sector dropped by 20M tons from May to June 2012. This was based on EIA weekly coal production, FERC monthly electricity and natural gas market overview, and EIA weekly natural gas update. I will explain in a new article soon.
Investment is about doing due diligence study to calculate your risks and rewards, and about taking on calculated risks in order to reap big rewards. The US coal sector remains the most worthy investment opportunity in 2012.
To my fellow PCX share holders: I feel your pain! But do not give it up when the coal sector is about to rally big time. Consider this remaining great valued in coal:
- James River Coal [JRCC]
- Arch Coal Inc. [ACI]
- Cloud Peak Energy (CLD)
- Alpha Natural Resources (ANR)
- Consol Energy (CNX)
- Black Hills Corp. (BKH)
- Walter Energy (WLT)
- Westmoreland Coal (WLB)
- Peabody Energy (BTU)
- Nacco Industries (NC)
- Alliance Resource Partners LP (ARLP)
- Market Vectors Coal ETF (KOL)
Finally, I did try to make a right call on PCX. I will issue no apology on that bad call, but I can take egg yolk thrown at my face.