Jon Sharp

Jon Sharp
Contributor since: 2012
Company: Islet Nine LLC
In your last article you said that the fake supplier controlled by the undisclosed related party wasn't really fake but part of a brilliant direct sourcing strategy to drive down inventory cost. Now you say selling the inventory from the fake supplier would decrease margins (because of its high price).
Also, your figure for off-book payments is not accurate. In a fraud scenario, as long as the cost of the real inventory stays on the balance sheet it is only necessary to hide the *cost* of the fake inventory which was expensed (which is priced low to pad the margins). And in any case, the need to spend money off the books does not strike me as burdensome...
I think there are some problems with your case...
When you take the whole picture together it suggests that inventory is not being fully expensed when sold.
Congrats, thanks for putting together this great article. I'm not sure if, based on the numbers you presented, I would come up with exactly the same ranking as you did in your conclusion. But even so I found it informative. Thank you.
Thanks for the article.
Met coal pricing isn't very transparent, but since February steel and met coal stocks (thinking WLT, AKS, X, JRCC, ANR) have been on a slide. We can infer that its not looking too good for met coal prices.
That is a double whammy for a company that reorganized extensively towards met, anthracite, & illinois basin thermal last year. I don't think the recent bounce in CAPP thermal pricing helps them very much. I'd steer clear of this one.
The why for the change in ANR is basically the ~2.5B loss and restructuring in Q2 2012. How to interpret it is probably arguable.
Liquidity has improved at both ACI and ANR.
Long ACI.
David Hume is rolling over in his tomb.
Expectations of improvement in the industry should have a bullish impact on the CAPP mining stocks. Do you think if Romney's chances continue to improve over the next week or two it will be a good test as to whether or not investors agree?
Thanks for the comments.
I keep thinking about whether it is cost-effective for the operator of an Appalachian bit coal plant built in the 50s or 60s to invest in the upgrades. Data in the previous article I wrote on EPA regs suggests probably not. That's not an enormous effect in terms of capacity but it is fairly immediate and should be rough on the marginal CAPP producers -- before even thinking about current natural gas prices.
Interesting points on NGVs and CO2 regs. I'm looking forward to seeing how the expectations play out this week.
My back-of-the-envelope calculation is that ACI gets about 35% of its revenue from met, that is based on 7.5 million tons @$200 relative to annualized Q2 revenue.
Do you have information I don't have?
Do you have a link for this?
I can't imagine they had any active met mines last quarter since their gross profit was essentially $0
I haven't researched this either but I will elaborate on rockyrocky's guess:
Shale gas wells have exponentially declining production curves because the extraction works through shale surface area.
Plus, all the capex (what with the drilling and the piping and the explosives and the wellhead) is up front. After that, it is gas on tap.
Plus, capital costs today are as low as they can get.
So you drill, baby, drill. And then next year's contract prices drop below your linear EUR break-even costs, but you keep drilling because everyone has exponential decline rates and you are playing the long game. Your capital costs are so low you can shut in your well and bide your time, so drill some more.
Feedback doesn't work through price, you have to watch your competitors. That would explain historic instability of natural gas prices. All those operators planning to build gas plants may be in for a surprise.
Thanks Seth I enjoyed the article. I concur about ANR -- hard to estimate the "real" book.
I wish I could share your bullish attitude about steel demand and IO prices. The new Chinese government will care about economic growth but I'm not sure they'll continue the infrastructure and see-through-high-rise mania.
On IO prices take your observation about FMG's ramp-up and look at this graph:
http://bit.ly/QCxuSO
OK a look at the cash flow statement, and it looks like depreciation is perennially running higher than peers, and they are lean on PPE/revenue before the Massey purchase and after Q2, so maybe there is front-loaded depreciation to the tune of about 100M/Q.
Toss in 100M, exclude one-times and the operating margins are still terrible. Low Cap Ex suggests many of their mines are far from profitable in this market. I can't see it.
Am I missing something? Whence EPS?
I'm curious, how do the ANR longs talk through the income statements?
The operating margins are terrible even ignoring one-time charges. Its a pricey shop with relatively expensive inputs, enough to scare me away. I'd think you'd have to be banking on some kind of miraculous turnaround.
Thanks all for the feedback.
I like ACI because it has large mines in most of the regions, posts pretty good margins, and has termed out its debt. I think it will pull through these tough times intact and is priced at a discount. I have a long time horizon and think coal is mauled pretty badly but not dead -- it has a few cycles left. That said, there is probably no great rush to accumulate shares.
CNX is an interesting company, I thought its NG exposure makes it a little agnostic to this topic. I'd have to explore it further.
I read SA a lot and wouldn't follow Mr. A's advice but agree the entertainment value of his articles is tops.
Tristan, thank you for the interesting read. I think one challenge is the 'synfuel' must have a substantial inherent cost advantage over the 'syngas' input.

Otherwise the profit margin will decay to nothing over time.
FXF - Aren't you betting against the Swiss National Bank with this part? I thought they were holding it at 1.20 CHF / 1 EUR.