November 11, 2009
In this highly uncertain investment climate, leave the speculative plays to those armed with hyper-speed trading supercomputers and the narcotic allure of risk-rewarding bonuses. Far-sighted Fools focus their gaze elsewhere, scouring the investment universe for those standout stocks capable of delivering shareholder value over the long haul.
Coal stocks continue to burn like a blast furnace. The Market Vectors Coal ETF (NYSE: KOL ) has now risen more than 200% from its March lows, and even stark warnings from Appalachian miners like Massey Energy about the potential impacts of mine permitting delays have not appeared to hinder the advance in related mining shares.
Although this Fool senses a possible pullback looming on the near-term horizon, the positive long-term investment climate for coal has been substantially confirmed even as domestic demand has imploded.
China, India, and other emerging-market economies have exhibited resilience to the global financial crisis, fostering an outlook for tight global supply for years to come. Although domestic utilities have stockpiled mounds of thermal coal that will weigh upon less export-ready coal miners, those companies that are positioned to ramp up production in response to increasing global demand (or possess other key competitive advantages) comprise this Fool's top five picks for long-term exposure to a strong fundamental outlook for coal.
- Peabody Energy (NYSE: BTU ) has topped this Fool's list of compelling investments in coal for quite some time, and it continues to exhibit the right mix of highly scalable U.S. production in the Powder River Basin (PRB) and increasing production of both thermal and metallurgical coals from Australia to quench the Pan-Asian thirst for coal. Historically, U.S. coal exports were dominated by high-quality Appalachian products, but fellow PRB giant Arch Coal (NYSE: ACI ) recently announced an emerging focus upon shipping PRB thermal coal to the Asia-Pacific region, and this Fool views Peabody Energy among the greater beneficiaries of such a transformative trend.
- CONSOL Energy's operations (NYSE: CNX ) may be halfway around the globe from the new centers of demand growth, but CONSOL operates a bustling export hub in Baltimore and boasts one of the lowest-cost met coal mines in the nation. Additional competitive advantages include CONSOL's greater than 80% stake in subsidiary CNX Gas to benefit from coalbed methane extraction, and a mine profile consisting of 96% production from underground mines (providing relative insulation from the Appalachian surface-mine permitting challenges).
- Alpha Natural Resources (NYSE: ANR ) posted a third-quarter loss as merger costs and special items weighed on near-term results, but after the acquisition of Foundation Coal Holdings, this miner is one serious coal-fired heavyweight. Raising 2010 met coal production guidance by 1 million tons to between 10 million and 12 million tons, and leaving 54% of that production unpriced, Alpha is beautifully positioned to reap the rewards of met coal mania. Alpha calls the long-term outlook for global coal demand growth "staggering," predicting a 60% increase in Chinese consumption and a 40% rise in India's needs between 2010 and 2030.
- Yanzhou Coal Mining (NYSE: YZC ) is the only coal miner available on the big board that mines coal principally at the geographical heart of this booming demand. With the addition of Australia's Felix Resources, Yanzhou is transitioning into a global presence within the region of choice, and China's explicit policy directive to promote commodity asset purchases overseas provides a favorable backdrop for further acquisitive growth. With the shortest route to market, I expect Yanzhou's coal to command a relative premium.
- Teck Resources (NYSE: TCK ) is back from the edge of oblivion, and is enjoying a new lease on life now that met coal prices have ushered in the kind of cash flow that was originally anticipated from the $14 billion deal to acquire Fording. Teck's Elk Valley mining camp is quite simply an elite property in the context of the outlook for global met coal demand. With immense reserves supporting 47 years of production at current rates, the Elkview mine in particular is the kind of asset upon which Fools can build a legacy investment. Were it not for the substantial debt burden that remains, Teck would have found itself even higher on this Fool's list.
Well-disciplined Fools will require no reminders, but this breakdown must by no means replace a more comprehensive process of due diligence. What's more, with the extent to which U.S. coal mining shares have surged higher even as the dismal demand drivers at home have grown increasingly clear, I believe that this is not an opportune moment to initiate positions all at once. Cash on the sidelines can be a powerful investment tool when one has long-term equity targets selected for strategic entry. The "watchlist" feature at Motley Fool CAPS is an effective tool to assist in formulating entry strategies, and an entire community of talented investors will gladly share their thoughts on your stock selections. Before you join the free community, be sure to vote in the Motley Poll below.
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