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Joe Springer
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It is very hard or impossible to time the broad market consistently — there are no famous investors that got rich by consistently knowing what the broad market would do next. This only makes sense, as there are just too many variables in the broad market. But there are many famous investors who... More
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  • It's The End Of The Coal As We Know It.. 19 comments
    Jul 26, 2014 2:14 AM

    The Powder River Basin has a whole lot of "clean" coal, and even though the EPA seems set against all coal right now, the PRB may end up a great energy investment one way or another.

    So we took note when Arch Coal (ACI), the largest miner in the PRB, hit a 52-week low today.

    Time to buy?

    They've got a moon-sized deposit of coal, but also an ocean of debt, and a peninsula of no-earnings. Their debt is not due for a few years, but it appears as it is today they would likely not get reasonable financing and may have to declare bankruptcy.

    Their current debt is being sold by its owners as if the risks have increased substantially. Bonds issued a few years ago yielding 7.25% are now paying twice that, reflecting a lot more risk. This has accelerated sharply in the last 2 weeks:

    (click to enlarge)

    The last 2 weeks seem like a death knell, and Arch is not alone.

    Coal miner Alpha Natural Resources (ANR) is in a similar situation:

    (click to enlarge)

    Walter Energy (NYSE:WLT) also looks like its days of borrowing are over:

    (click to enlarge)

    Peabody Energy (BTU) still looks better than the three in trouble, but they are viewed with increasing risk:

    (click to enlarge)

    Is there any good news?

    The last couple of weeks has not been kind to Consol Energy (NYSE:CNX), but they still look in good shape:

    (click to enlarge)

    Finally, it looks like PRB pure-play Cloud Peak Energy (NYSE:CLD) is in good shape, the debt is sought after:

    (click to enlarge)


    In the past two weeks it appears that the collectively perceived credit quality of Arch, Alpha, and Walter have taken major hits. It seems like they will need some luck to avoid eventually running out of money, not being loaned any more, and declaring bankruptcy. This may not happen for years, but it seems like the decision has already been made by the bond market.

    This could prove a boon for the companies that are expected to survive, notably Cloud Peak and Consol, and perhaps Peabody. It could be that these companies are able to borrow more and pick up assets at fire sale prices as the troubled three sell to stay afloat.


    It's worth comparing these charts to the entire high yield (aka "junk") corporate bond market:

    (click to enlarge)

    The insatiable thirst for yield has created a lot of demand for below investment-grade bonds (again "junk", anything below the top 4 investment grades like AAA, AA, A, BBB).

    The fact that the three troubled companies' debt is unwanted against historically high demand is noteworthy.

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Comments (19)
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  • Joe Springer
    , contributor
    Comments (2650) | Send Message
    Author’s reply » Updated
    26 Jul 2014, 11:41 AM Reply Like
  • sheldond
    , contributor
    Comments (1463) | Send Message
    Well I have two courses of action I can take to profit from the above information.....and a few things to consider.


    Ole king Coal.....


    Interesting thoughts as usual
    26 Jul 2014, 12:08 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2650) | Send Message
    Author’s reply » Thank you D,


    CNX as it turns out looks like it will not take advantage:



    But with the Larry Summers thesis of cheap capital going forward, and $CLD looking best positioned in the PRB, they look like they could emerge very well, their share price is basically right back to where they IPO'd..
    26 Jul 2014, 12:21 PM Reply Like
  • billyjoerob
    , contributor
    Comments (490) | Send Message
    Any way to get that coal from Wyoming or wherever to China?
    26 Jul 2014, 02:08 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2650) | Send Message
    Author’s reply » There would be by a planned rail route to the pacific NW, but environmental concerns, justified or not, continue to stand in the way. If the elephants get the White House in 2016 I'd say it's back on the table..
    26 Jul 2014, 02:11 PM Reply Like
  • vireoman
    , contributor
    Comments (1269) | Send Message
    If you're a fan of contrarian signals, there hasn't been a 'full-fledged' SA article on CLD since 7 Jan 2014. (Mark Anthony, where are ya when we need ya?). Thanks for a timely look at the bond prices.
    26 Jul 2014, 05:04 PM Reply Like
  • Joe Springer
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    Comments (2650) | Send Message
    Author’s reply » You are most welcome vireoman.
    26 Jul 2014, 05:05 PM Reply Like
  • dingojoe
    , contributor
    Comments (372) | Send Message
    Well, the common thread for WLT, ACI, and ANR is that they were high cost producers of met coal, which was OK when N. Australia flooded and isn't now that it's market that flooded not the mines.


    Of course, WLT is pure met and while their AL mines are still in the money, it doesn't look like enough to overcome all that debt.


    As for ACI and ANR, besides their met coal troubles, thermal in Appalachia is under the greatest pressure, both from the cheapest NG in the world and from cheaper coal in the Illinois basin. If you tried to boil them down to just PRB producers, again can you make enough off of PRB to overcome all that debt?


    As for China, you've written quite a bit on global coal, aren't there closer, cheaper sources of coal that China can use than PRB.
    27 Jul 2014, 11:17 AM Reply Like
  • Joe Springer
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    Comments (2650) | Send Message
    Author’s reply » Insightful comments dingojoe,


    "can you make enough off of PRB to overcome all that debt?"


    Seemingly for Cloud Peak, like you said Nat Gas is super cheap and they are profitable over the recent past. The bond market is saying they have cheap access to capital, as long as that is the case their interest on debt should continue to be bearable.


    China - the PRB needs a political change to get the coal shipped out the NW, it's a possible upside.


    I think the more likely bull case is fracking coming under its own pressure from the EPA, and also higher gas prices as gas producers need a better profit to drill.


    It seems like things can't get worse politically or with nat gas, and they still seem okay..
    27 Jul 2014, 11:46 AM Reply Like
  • dingojoe
    , contributor
    Comments (372) | Send Message
    CLD seems fine as it competes against NG prices from Henry or Opal which all closed Friday at around 3.80. That's not low enough to threaten CLD. However, NG prices at the main Marcellus hub (Dominion South) closed at 2.30 on Friday, well below what's needed to cause coal-to-NG switching in the East/Mid Atlantic. That's why ANR and ACI have problems beyond met coal.


    PRB producers do have to contend with the fact that renewables largely occur in their region--about 90% of renewables are west of the Mississippi plus Illinois. Also, CA, OR, WA and NV are all very anti-coal.


    On the debt front, CLD obviously has a manageable debt. My point with ACI and ANR are that if you could somehow boil them down to just PRB producers, the debt would still overwhelm any profit from the PRB--especially ACI, which seems to have the weakest PRB margins.
    27 Jul 2014, 12:26 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2650) | Send Message
    Author’s reply » I agree on ACI and ANR, it's hard to see how they can recover without gas prices, weather, and maybe politics sending a miracle.


    That's an interesting point about the renewables in PRB territory, I drove cross country a few years ago and there are a lot of wind farms out there, it's a sight.


    Yeah NV and the NW have hydro-electric, CA is of course anti-coal and pro-latte.
    27 Jul 2014, 12:40 PM Reply Like
  • dingojoe
    , contributor
    Comments (372) | Send Message
    Sorry, I did get you mixed up with another SA writer, Jon Springer, who writes extensively about Asian coal, especially Mongolia. He's the one I've gotten the idea from that China has cheaper opportunities to get coal than the PRB.
    27 Jul 2014, 12:35 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2650) | Send Message
    Author’s reply » LOL, there's also a Keith Springer on SA, and I think another one too..
    27 Jul 2014, 01:04 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8979) | Send Message
    A lot of China's coal is lower quality (much higher sulfur content), and due to a combination of local supply/demand and inefficiencies of SOEs, costs significantly more than US and Australian coal. Thermal coal ranges $86-$150 and for comparison PRB coal is around $12 and $78 in Australia.


    The issue with the PRB is huge rail (monopoly) transport costs combined with adamant environmentalist objections to west coast export facilities. If significant export capacity was developed on the west coast, we could see PRB coal theoretically $30 or higher per ton, which would make these mines staggeringly profitable.


    In the Illinois and Appalachian Basins, the biggest issue is cheap natgas. This is a short-term pricing abnormality imo-- once the giant LNG export facilities come on line, we should see prices shift into the $6-$8 range. It also remains to be seen how steady state the fracking seams will be, and if there will be any environmental issues/discoveries along those lines.


    I'm long ACI and ANR- they are both 10x opportunities if the market normalizes BEFORE 2018. 2018 is when I predict bankruptcy is a possibility.


    I'm also long BTU, but in a smaller size. This company is financially solvent and has better asset placement in Australia, but is probably only a 2-3x if the market improves.
    27 Jul 2014, 12:55 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2650) | Send Message
    Author’s reply » Great points J.
    27 Jul 2014, 01:05 PM Reply Like
  • xtian13
    , contributor
    Comments (423) | Send Message
    Good stuff, Joe Springer. I should read the Instablogs more often.. I'm an ACI long and I've been trading the swings since Dec/Jan. I've done better trading it than I have investing in it lol, but c'est la vie.


    Good luck to all my fellow coal longs.
    28 Jul 2014, 08:03 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2650) | Send Message
    Author’s reply » Thank you xtian13, best of luck.
    28 Jul 2014, 11:03 PM Reply Like
  • brigantine partners
    , contributor
    Comments (164) | Send Message
    As a result of mistimed acquisitions into the met coal market, almost every coal company is slogging around a debt load that may sink their companies into bankruptcy. But that said, there are many good and peculiar things surrounding the coal industry that indicate a potential pricing bonanza that is coming.
    Let's take the PRB issue itself as a means of one of the most peculiar. By almost every PRB company and the railroads that service them, there appears to be a real rail issue which is delaying shipments. Why exactly that is could be due to several known factors, such as coal loading problems and subsequent pollution/damage to the tracks themselves, or other unknowns not yet revealed. What is certain is that bottleneck issues at loading and delivery are causing delays in revenue and shipments.
    What is odd about this however is the falling price of PRB coal in the face of bottlenecks/shortages and dwindling supplies at customer facilities. Coal inventory levels are down to multi-decade lows, even with the cool summer. Shouldn't economics be causing prices to go in the other direction, and possibly rapidly?
    Say what you want about the relative climate effect of coal burning and CO2 emissions, but coal still supplies around 40% of US electric energy needs. Despite future regulations which may or may not be implicated, coal is still very much needed today, in the US, by US utilities. So why is the price of the commodity falling in the face of shortages and dwindling deliverable supply?
    I think this is a tremendous mispricing, one which is ultimately linked to the price of natural gas in the US, and the "relative abundance" of shale gas supplies
    The natural gas revolution and the success of fracking is the subject of another piece, but it is the driving force behind this apparent mispricing of coal. Given the relative abundance of shale gas, due to Marcellus "success" in the short term, the price of gas has stayed well supplied and low, as have the complacency of their consumers, namely utilities. Despite the near record shortage of coal and the rising use still in today's electricity generation, utilities have not panicked into sending the price of PRB coal higher. Why would they, when they feel exceedingly confident about their ability to procure just in time natural gas? Except what happens when weather shortages hit? The price of gas for immediate delivery skyrockets, as it did this past winter. Faced with this occurrence a few more times, the utility customers may start to get more concerned, and feel the urgency of rebuilding coal supplies. Delivery constraints will still exist due to a number of ongoing factors. So what will happen to the deliverable amount of PRB coal, albeit in lower volumes? The price will go much much higher.
    This doesn't even account for the possibility of materially higher natural gas prices in the future, due to a combination of demand and a realization that current supply is highly frontloaded, with less and less reliable supply coming in the future. WHEN this happens, which is almost a certainty given the current decline dynamics of natural gas drilling, both NG and Coal will price higher. This also does not include the option of renewed China demand, which will eventually come and work off the oversupply of met coal. But that is less valuable to a company like ACI, which is highly levered to the PRB price and natural gas by extension.
    The only question with ACI and the other coal plays, like ANR, BTU, and CLD, is who will be around to prosper the most when the turn in NG and coal come. ACI is a highly levered bet on that outcome, and could produce enormous returns from these levels. But ACI is also on the razors edge regarding bankruptcy, based on both market signals (price of bonds and stock), and their ongoing cash burn against their dwindling cash position. Personally, I like the bet, but it is a very levered bet, that has a significant chance of going to zero (stock), and uncertain recovery rates (bonds). ACI as an entity will come out the other side. The billion dollar question is whether any current stakeholders, other than management, will receive any return on their money, or even their money back.
    29 Jul 2014, 01:08 AM Reply Like
  • Joe Springer
    , contributor
    Comments (2650) | Send Message
    Author’s reply » Thank you for that brigantine partners, great information.
    29 Jul 2014, 01:16 AM Reply Like
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