L & L Energy, a Global Coal Company Benefiting from China's Expansion
L & L Energy, Inc. (NASDAQ: LLEN) is a United States publically traded company that has a majority of its operations in China, but unlike many of its Chinese-based competitors, L & L has recently entered the U.S. market in an attractive and potentially very accretive manner through its partnership with Bowie Resources. There are many small to mid-size coal mining operations in the current marketplace that wish to have the ability to maintain successful operations in both the U.S. and China (given the extremely robust demand in both countries), however very few actually possess the wherewithal to achieve such desires.
L & L is one company that now possesses such abilities. With its dynamic team of bilingual and experienced professionals, the company is uniquely positioned with the ability to connect small and mid-size mines, such as that of Bowie’s, to the massive demand originating from China. In such a partnership, L & L should be able to help expand Bowie’s margins for its U.S. coal mining operations, but more importantly should be able to generate a very attractive margin for its own investors.
In its relationship with Bowie, L & L has provided a bridge loan of approximately $7 million to facilitate the development/completion of its long wall-mining operations in Colorado (expecting to have annual production capabilities of up to 5 million tons per year). L & L carries co-senior status with GE Capital and also receives interest payments of 9% per annum. Most importantly, this loan has allowed L & L to secure long-term supplies of high quality coal for its Chinese customers, as well as adopt mining best practices, and leverage Bowie’s mining management and safety practices. Per the article included, Bowie is making significant progress on its development: BOWIE ON TRACK FOR INCREASED PRODUCTION.
Blending U.S. and Chinese coal to create a compliant product could prove to be a very successful opportunity for L & L: China’s coal reserves are notoriously lower in quality (i.e. higher sulfur and lower Kcal), which has created a surplus of coal reserves in China that is unmarketable in its current composition. If a company, such as LLEN, is able to blend a higher quality U.S. product with the lower quality product from China, then the combined product could be very marketable and highly profitable.
This process involves sound relationships on both sides of the world as well as significant infrastructure and knowledge of the coal market and transportation marketplace. Outside of Peabody Energy Corporation (NYSE: BTU), Arch Coal, Inc. (NYSE: ACI) and Alpha Natural Resources, Inc. (NYSE: ANR), few U.S. producers and/or Chinese producers possess bilingual management and capabilities on both sides of the ocean to engineer such a transaction. Per this new partnership, it appears as though L & L is on the right path to achieve such aspirations and is well on its way to successfully becoming a fully integrated global coal operation.
Below is an incremental analysis of the potential profits that could be generated for L & L shareholders as a result of its partnership with Bowie (i.e. acquiring high quality coal from Bowie, exporting it to China and blending it with lower quality Chinese coal, then selling the product in the Chinese marketplace at extremely attractive price points).Note: the below data are estimates not derived from the Company, but rather from reviewing comparable transactions and deals within the coal industry and therefore can be considered reasonable.
Costs of acquiring and transporting U.S. coal in order to blend it with Chinese coal:
The following scenario assumes the company can:
- Ship high quality, super-compliant coal from the US to China
- Acquire lower quality coal in China (below market price due to its current composition)
- Blend both products together (on a 1:1 ratio) to create compliant coal in China (could potentially blend at a much higher ratio, which would further increase margins and overall profitability)
- Sell the coal for current market price on the thermal market (approx. $120 per ton, based on estimates)
- The company secures a letter of credit to finance production and transportation costs until coal delivery
Per Ton Analysis (based on author’s assumed figures):
Based on the above analysis, as well as the per ton profit margin, there seems great potential that LLEN’s partnership with Bowie could likely be highly accretive to shareholders if executed successfully. It is important to note that this opportunity is created by the fact that LLEN has a global management team, and impressive Board of Directors, with relationships both in the U.S. and China. And as a result of developments such as this Bowie relationship, LLEN (unlike other U.S. listed Chinese companies) has the ability to successfully negotiate, manage and secure coal supplies from U.S. mining operations; in turn generating healthy profits per share for its investors in the short and long term once sold back in the Chinese marketplace. As such, the future appears quite promising for L & L and its shareholders; it will be interesting to see how this aspect of the business further develops and expands in the future as the company continues to pursue other partnerships similar to that of the Bowie relationship.
The author of this article may or may not have a position in LLEN, BTU, ACI, ANR, MEE and WLT.
Reference: LLEN, BTU, ANR, PCX, ACI, CLD, WLT, YZC
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.