Alpha Natural Resources: My Favorite Coal Name

I'm like a broken record here - Alpha Natural Resources (ANR) with blow out earnings. However, hedge funds urge you to buy health care stocks with 7% growth so please sell these immediately and run to those. Thank you for your time. US Steel (X) is also absolutely incredible on the earnings front this morning.

Just a quick bookkeeping note - I am selling some ANR into this spike @ $97 range simply because this market is putrid and hedge funds don't want coal or fertilizer. This is my favorite coal name and one day it should be back to a major stake in the fund - but until money flow returns to the sector I am selling spikes - down to a 1.9% stake. I have been tickled to death with the earnings reports from our portfolio thus far - our stocks are absolutely destroying estimates, pushing guidance up and making us very happy from a fundamental standpoint. But as I keep repeating, until the market cares (and I don't count these oversold spikes as real buying) I am selling spots of strength. When the next real move happens in these spaces they will be sustained multi-month moves. If we miss the first week or two of it, we'll live. Protect capital is job #1.

Back to Alpha Natural Resources whose story, I believe, is just beginning.

• Coal mine operator Alpha Natural Resources Inc. on Tuesday reported record earnings on improved margins and increased metallurgical shipments. Alpha said profits for the second quarter increased to $74.3 million, or $1.04 per share, compared with $4.7 million, or 7 cents per share, in the year-ago quarter. The latest quarter included several special charges worth a combined 42 cents per share, and an income tax benefit of 16 cents per share.
• Revenue increased to $732.2 million from $435.3 million. (+68%)
• Analysts surveyed by Thomson Financial expected earnings of 53 cents per share on revenue of $571.4 billion.
• The company's coal margin per ton rose 130 percent in the quarter to a new high of $21.85.
• "Persistently strong demand for metallurgical coal from steel producers worldwide is having a profound impact on our financial performance," Michael Quillen, Alpha's chairman and chief executive, said in a statement. (I love these new words I am starting to see in the fertilizer and coal earnings reports - we had miserly and now we have profound)

Forecast

• For 2009, the company expects net income of $1.0 billion to $1.3 billion and coal revenue of $3.7 billion to $4.4 billion.

Translation - $1.0B to $1.3B on 70M shares =$14.30 to $18.50 in 2009 EPS. I estimated in April back of envelope $10-$15 without 1 single analyst report and just reading news and using this profound instrument called a calculator. While analysts who follow 1 sector day in and day out and know 10,000 times as much about the sector since this is as a full time job for them, were telling us it would be somewhere in the $3s range. Another job well done.

When you really think about this earnings power - much like the fertilizer - it is reaching the point of humor that hedge funds are fleeing this group because "the world will be ending" and "crude oil might go to $100 or gasp $80". But that's the markets for you. We're just the gnat on the big money's behind. Full report here which has a lot of detail I don't have time to break down in the blog. Synopsis: It's good. Very good. And just the start.

As I said, I hope Harbinger gets its way and forces Cleveland Cliffs (CLF) to break up this deal, because Alpha Natural Resources on its own is going to be a $200+ stock in 2009.  As I wrote, I thought $130 was complete thievery on the part of CLF but the hedge fund who controls nearly 1/5th of Cleveland Cliffs disagrees. How they think $130 is a bad deal is beyond me, but what do I know - they have an army of super computers and CFAs and MBAs. I'm just one dude trying to raise funds for a mutual fund.

Disclosure: Long Alpha Natural Resources, Cleveland Cliffs in fund; long Alpha Natural Resources in personal account

 

Comments

[jimmy46:]

I think you misunderstand the pricing power of the coal producers.

The price of electricity is usually set by the cost of methane,
the coal users get an extra profit that makes up for the higher
cost of coal plants.

Coal plants are the baseline producers of electricity,
methane is used for intermediate & peaking.

If the cost of coal goes too high, the intermediate
& peaking plants will be used instead of the coal plants.

Result: less demand for coal.

My utility uses coal for 44%, and methane for 35% of
production.

The numbers CAN shift.

2008 Jul 29 03:02 PM

[Mattybuoy:]

Err you do realise that none of that applies to metallurgical coal, which is used solely for steel-making, and cannot be substituted.

2008 Jul 29 04:16 PM

[pachanguero:]

jimmy did you use steam coal numbers?

2008 Jul 29 08:22 PM

[pachanguero:]

Another fine piece Mark. Care to comment of PCX? And CNX coming up soon? Thanks.

2008 Jul 29 08:23 PM

[john s. gordon:]

coal is used for baseload electric but is 30% efficient, and requires pollution controls.

NG in combined-cycle cogeneration baseload but is 80% efficient in that application, may or may not require NOx control depending on location & SIP constraints.

some fuel oil is used for peaking generation (low efficiency, no reheat).

it's hard to generalize on an overall national basis that electric from coal & electric from NG are cheaper or more expensive than each other.

uranium is stated to be cheaper than any other alternative for baseload, but that is because we haven't closed the fuel cycle yet & the cost of long-term storage of high-level waste will be paid by future generations of peoples.
> jack

2008 Jul 30 09:40 AM

[john s. gordon:]

matty - quite a bit of met coal is used to boil water in teakettles, it's a misallocation of a scarce resource but due to low sulfur content does not require scrubbers which utilities loathe. state corporation commissions have approved fuel-cost adjustments, so that consumers (you & i) get soaked for the excess fuel cost in today's high-priced met-coal market. my local utility (D) is heavily nuclear but they hit me with a coal-price adjustment anyway. something needs to be fixed in denmark (my apologies to mr.shakespeare)
> jack

2008 Jul 30 09:46 AM

[eltigre:]

fantastico, as per usual. the name of the game seems to be energy.

2008 Jul 30 10:04 PM

[Mattybuoy:]

Sure, some met coal is used for power-generation I have no doubt. The point is, the price for it isn't determined by what's going with electricity. It's purely a function of the steel mills demand.

Besides, did I not see that 51% of Alpha's production went for export in this quarter? No-one will be transporting the stuff half-way around the world for making electricity.

Face it, it's a good stock! :)

2008 Jul 31 02:00 PM