Not All Nations Have Soured on Coal

The World Bank has made a public shift to stop funding coal fired electric plant construction abroad. Large global lenders like the European Investment Bank have followed suit. However, that shouldn't stop China and India from continuing to build coal plants.

In its second quarter earnings report, Peabody Energy  (NYSE: BTU  ) notes that China's coal imports rose 13% while India's imports increased by 9% in the first half. Longer term, China is expected to bring online another 250 gigawatts of coal fired electric power by 2017 while India should power up 70 gigawatts' worth.

Although reduced support from large global lenders will hinder coal fired power plant growth in smaller countries, neither China nor India fall into that category. The near-term growth in demand from these two nations, then, isn't going to be affected. And since these two nations underpin the long-term demand picture, too, coal is likely to remain an important and growing part of the world's power picture for years to come.

The "local" player
Peabody is one of the best positioned companies to serve Asia because it has operations in the U.S. and Australia. Australia, which represents just under half of the company's business, will benefit from its close proximity to both Asian giants. As those two countries increase imports to meet growing coal needs, Peabody's Australian operations should see increased sales. And, as pricing improves, volume and price will work together to create a double benefit.

In addition, Peabody is a big player in the Powder River Basin domestically. This coal area has extremely low-cost coal that is increasingly being sent overseas to, you guessed it, Asia. So, the company should benefit from increased Asian demand on both sides of its business.

This year is going to be a tough one for Peabody. The company is projecting anywhere from a loss of $0.16 a share to a profit of $0.09 a share in the third quarter. Unless coal prices move higher, the fourth quarter is likely to be about the same. However, with direct and indirect access to the core coal demand markets, Peabody is a relatively low-risk option for investors seeking a turnaround play.

Powder River focus
For those with a more aggressive bent, there is Cloud Peak Energy (NYSE: CLD  ) . The company is tightly focused on the Powder River Basin, so its results will rise and fall as demand and prices for PRB coal increase and decrease. That's why this stock is riskier than far more diversified Peabody.

However, Cloud Peak is working to increase sales to Asia. For example, in 2008 the company sent less than 1% of its coal to the region, but in 2013 it's projecting that number to hit 5.5%. This shift has already helped to offset falling U.S. coal shipments and sets the company up to serve a growing coal market.

That said, Cloud Peak's largest Asian customer is South Korea, not China or India. So it isn't exactly tied into that region's coal demand growth. However, it does have an important seat at the table. So, investors looking to benefit from increasing Asian demand would do well to take a look.

Like Peabody, however, Cloud Peak is looking at a lean year through the rest of 2013. Despite that, the company continues to work on increasing its ability to export coal from West Coast ports. And coal stockpiles at U.S. power plants are heading lower, which will eventually lead to an increase in domestic demand. So, as coal prices and demand recover, the company should be in good position to benefit. Growth will come from its increasing export efforts.

Back at home
Meanwhile, as more players look to Asia for growth, it makes sense to look at a domestically focused leader like Alliance Resource Partners (NASDAQ: ARLP  ) . Alliance's coal volume was up about 13% year over year in the second quarter while realized prices were down about 7%. That combination led to yet another quarter of record results.

That's a common theme at Alliance, which has increased sales every year for a decade. While other industry players are struggling, Alliance has been a rock. And expect another record year in 2013 since management recently increased net income guidance.

The units yield around 6%, backed by a decade of annual distribution hikes. As others look to Asia, Alliance stands to gain even more market share domestically.

No money
Although it may be harder for smaller countries to fund coal utility construction as the West reduces its support, this shift is unlikely to stop China's or India's coal efforts. Peabody is tied directly into Asia via its Australian assets. Cloud Peak doesn't have the same exposure, but is working to grow its share in the region. Alliance, meanwhile, is a contrarian play on Asian demand, since it is doing well domestically and will have even more opportunity to gain share as others look to Asia for their growth.

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