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Canary in the Coal Mine


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Posting this separate from the energy thread as that one is more focused on Oil, and I also like this title.

 

I've owned oil for a bit, but recently picked up some coal stocks. Coal is facing some of the same dynamics as Oil - tight supplies, years of underinvestment, ESG - except the valuations are even more compelling (think 2-3x FCF).

 

Even before the Ukraine war, coal prices were on a upward trek. There were multiple bankruptcies a few years ago and now the balance sheets are very clean. At least for the 3 companies I own - AMR, ARCH, and BTU. Capital allocation is again on par with the oil industry - higher dividends and buybacks, not much new capex or M&A. 

 

AMR is the most interesting one in that they are buying back like 10% of their shares outstanding per quarter, and are debt free. ARCH is returning cash mainly via dividends. BTU can't return capital until it pays back its surety bonds and collateralizes its letter of credit facility (nearly there).

 

The big near term risk is the recession as Steel production comes down, but the Met Coal can be redirected for Thermal use. Another risk is quick resolution of the war AND repairing Nord Stream, though this seems unlikely any time soon. Meanwhile these companies are generating massive amounts of cash and returning (or planning on returning) it to shareholders.

 

Coal is still the largest source of world power generation and these stocks are being priced for death.

Edited by Mephistopheles
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3 hours ago, Spekulatius said:

Redirecting meth coal to thermal coal means selling for a fraction (1/3 ?) of the price. Yes, it can be done but economically, it makes no sense.

Thermal has been > met much of this year. The above companies have been redirecting. 

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