Coal Stocks: Make Money in Picks and Shovels

How hot is coal?

Goldsource Mines Inc. (GXSFF.PK) was searching for diamonds in Saskatchewan last May when they stumbled on a high quality coal seam and their stock soared 9,100% in 3 months.

The irony of a diamond exploration company striking it rich by discovering coal can hardly be overstated.

Supply shortages create opportunities for investors.

In the last three months, China has closed 58 power-generation plants due to coal shortages.

Stock piles at some plants have fallen to three days consumption. China currently generates 80% of its electricity from coal.

 The Chinese State Electricity Regulatory Commission has issued a “Red Alert”.

In recent months, any stock with coal dust on it has been heading north.

Patriot Coal (NYSE: PCX) is up 300% in the last 4 months. Alpha Natural Resources (NYSE: ANR) is up 500% in the last year.  Peabody Energy Corp (NYSE: BTU) is up 166% in the last 10 weeks.  Van Eck Market Vectors Coal ETF (NYSE: KOL) is up 43% in the last 3 months.

My own memory of coal dates back to the 1960s, growing up in Cambridge, England.

I remember “The Coal Man” coming in the autumn and filling our bin with big chunks of shining black rock which we would burn in a furnace to keep warm in the winter. 

Back then, I doubt my parents had ever heard the term “global warming”.   A “carbon footprint” meant identical shoe size.

Nowadays coal has a reputation for being dirty, inefficient, and dangerous.

How dirty?

Coal creates 1.7 times more carbon per unit of energy than natural gas and 1.25 times more than oil.

How inefficient?

You have to burn 900 lbs of coal to create enough energy to power a single desktop computer for one year. 

How dangerous?

On July 7, 2008 an explosion in a coal mine in Shanxi Province in China killed 21 miners.  That’s only twice the daily average.  The Chinese annual coal mining death toll decreased 20% in 2007 to 3,800.

50% of the electricity currently generated in North America comes from burning coal.  So, although it is invisible on the above chart, 17% of our home heating still comes from coal.

There is enough coal left on the planet to last another 230 years.

Unless you are living “off the grid” – you are already a consumer, so let’s look at coal as an investment.

Since 2000, the price of coal has risen from $30 per tonne to around $120 per tonne. The Chinese are paying twice as much for coal now than they did a year ago.

When resource stocks go vertical, they tend to bounce back hard, and indeed a correction is already underway.

Avoid the Overheated Coal Stocks

The last couple of weeks, Patriot Coal lost 18%, Alpha declined 10%, Peabody is down 12% and the Van Eck Coal ETF fell more than 10%. Industry analysts believe that coal supply deficits will continue until 2011.

I expect that coal with slowly give way to cleaner, cheaper energy.  Geothermal, wind, hydro and solar are on the rise.  Nuclear power is also likely to eclipse it.

That said, there is money to be made in coal in the short term.

The thing you must do is avoid stocks that are overbought in the recent speculative rush.

Here is a picks and shovels company with a lot of upside.

Make Money in Picks and Shovels

Bucyrus International Inc. (Nasdaq: BUCY) is a $4.6 billion company that manufactures equipment for the coal mining industry, and other mining sectors.

They have surpassed analyst earnings estimates for the last four quarters by an average of about 18%. Q108 orders increased 58%.  They currently have a backlog of $2.07 billion worth of mining equipment on order.

Their biggest competitors, Joy Global In (Nasdaq: JOYG) and CNH Global NV (NYSE: CNH)  have quarterly revenue growth of 34% an and 25% - compared with Bucyrus’s quarterly growth of 171%.

Bucyrus share price has doubled over the last 12 months.  This is not a volatile stock.  The gains are steady, attracting risk-averse value investors.  A resource boom will create winners out of companies that sell picks and shovels.

Worldwide, we consume about $1.5 trillion worth of coal per year.  Coal is mined in 100 different countries.  Environmentally it’s a bad marriage, but until we divorce – as investors – we may as well treat it with respect.

Disclosure: None

Comments

[hershfin:]

Numbers on coal stocks don't all add up. BTU bottomed in March at about $45. It's high since then was below $90. It's now at $65. That's nowhere near 166%.

2008 Jul 18 10:35 AM

[Eric Frantz_:]

I can only see this as a short to mid term play. Coal has a relatively uncertain future because of its political volatility and an increasing call for renewable energy from the market, not just hippies.

emervest.blogspot.com

2008 Jul 18 11:33 AM

[Eric Frantz_:]

I can only see this as a short to mid term play. Coal has a relatively uncertain future because of its political volatility and an increasing call for renewable energy from the market, not just hippies.

emervest.blogspot.com

2008 Jul 18 11:33 AM

[Investor612:]

I've owned Bucyrus since 2005. It's been a quadruple for me. I;ve since sold half. You're telling people to get on board long after the train has left the station.

2008 Jul 18 12:00 PM

[huangjin:]

One reason for the coal shortage at Chinese utilities has to do with the difference between the prices for coal and electricity, which are set by the government.

2008 Jul 18 02:20 PM

[john s. gordon:]

geothermal is not actually very clean. you have to dispose of the brine (tends to be smelly & corrosive to metals) somewhere (hazardous waste).
one reason for coal shortages in china is their fuel utilization efficiency is rather low (think u.s.a in the 1920's with lots of stokers)
> jack

2008 Jul 19 08:14 AM

[phaze:]

So far a coal and green energy go i would look to a calgary based company called alter energy. the symbol is nrg.v if your in canada. It has a lot in common with the larger usa based nrg in that it bought Westinghouse plasma and is refitting up to 400 coal plants and has a jv to make ethanol for gm. It also has about 700 million tons of coal that it is going to convert to 40,000 barrels per day of oil.

2008 Jul 19 11:59 AM

[whisperonth...:]

Or maybe you think if everyone sells, the stock will drop in price to where you can pick it up cheap again, and make a killing? Sounds like what the analysts do to the financials. Sounds suspicious to me...

2008 Jul 19 02:03 PM

[Urbane Gori...:]

China is cranking out new coal fired utilities on a monthly basis - I've heard one new plant, or two new plants a month. They are on track for the next several years. If coal production in China is dropping, then where will China get it's coal from? Does anyone really believe that China is ramping up coal-fired utilities as a scenic backdrop for tourists. Nope! Coal has a big and growing footprint in China... I lost the webpage, but there is a Chinese Government site that covers their yearly 'energy fair'. The main player is coal and coal production.

From what I can glean, what is happening in China is concern with pollution, (whoah!) mine safety, and efficiency (energy and production).

Factories and utilities have reduced production till the end of August to reduce smog for the tourists during the Olympics. (This is no secret, it was a publicized Government program). They have also been actively closing poorly run mines in China. Those that are behind the times and cannot produce efficiently. Also, if you look at the public outcry after the collapse of buildings during the last quake, you can see that even though China is still an authoritarian Government, they are very concerned about image and uncontrollable anti-government sentiment. They actually do respond in a semi-American fashion in attempts to quell bad sentiment. Mines that collapse or are health hazards produce bad sentiment.

Keep an eye on the coal stocks at the end of August. I'm expecting a ramp up again.

And BUCY and JOYG are good solid companies. They may be down a little now as well, but like CAT and DE they're probably just taking a seasonal breather.

Thx jegan ;-)

2008 Jul 19 02:08 PM

[lonie:]

At -20 on the Montana prairie even cow terds will do but i prefer coal even if it is dirty and generating electricity . Give me some coal !

2008 Jul 19 09:44 PM

[beth r:]

how about clean coal tech. cctc.

2008 Aug 07 07:37 PM