Coal Making a Comeback

by: The Illogical Investor

When the current USA administration was elected, the situation looked pretty bleak for coal stocks, alternative energy was cool and fossil fuels were the dinosaurs.

Well, how 24 months and an uncomfortably sticky economic crisis have changed views. Yes, governments are still talking about alternative energy, but as a harsh economic reality has struck, even money printing governments, whose subsidizes underpinned economic viability of many alternative energy companies have been thinking again.

So, what has this to do with investing?

There are the usual suspects of large cap coal companies that you can get plentiful research on, Peabody Energy (NYSE:BTU), Massey Energy Co (NYSE:MEE), Arch Coal (NYSE:ACI), but it’s difficult to get ahead of the crowd on well-researched large caps.

China is an option, with its insatiable appetite for coal, but I see their homegrown companies as acquirers rather than targets.

Well, if you look just north of the USA, there is a rather large neighbor who has plentiful natural resources and a strong currency....Canada.

Two interesting plays in their universe are Western Coal (OTC:WTNCF) and Grande Cache Coal (OTC:GACHF). First, you should be aware these are far smaller companies than Peabody etc, so liquidity is less. The size of these companies does however add the spice of potential takeover targets.

My favourite pick is Western Coal traded on the TSE under ticker WTN. The company has an excellent management team, expanding resource base and a cost structure that is being focused on to gain productivity improvements. The company has production facilities producing metallurgical, thermal and anthracite coal. Since following the company from the beginning of the year, the share price has returned 116% from its closing price at year-end 2009. There is still some room for the story to run with growth on the cards and the possibility of a bid in today’s resource hungry world. Look for a target price of $10.

Grande Cache, traded on TSE under ticker GCE, has experienced some challenges in increasing production in line with expectations. A major impediment for the company was one of their main shipping partners experiencing capacity issues, which negatively impacted Grande Cache. These negatives have provided an opportunity to buy into the potential of Grande Cache should there be any price weakness.

One other potential worth a look is Riversdale Mining Limited, an Australian listed mining company that operates out of South Africa with a major project in Mozambique. The company has attracted interest of Passport Capital, a California based hedge fund that holds approximately 15% of shares and Tata Steel, the Indian steel company, which holds approximately 20%. My research shows the company could have upside of 20% in share price to A$11.75 without any potential bidder appearing.

So if you believe that fossil fuels will be around for sometime, then these smaller coal miners are worth checking out.

Disclosure: Long Western Coal