BHP Billiton Is Bullish on Coal Long Term...If It Matters

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More signs continue to emerge that coal has a much brighter future than most in the U.S. understand. Most recently, the coal head of BHP Billiton (NYSE: BHP  ) forecast a robust demand future for the commodity. Most importantly, the executive forecasts that future growth will come outside China.

BHP Billiton is a massive global miner, with operations in iron ore, copper, and petroleum more important to earnings than coal. The news, though, could have bullish implications for Peabody Energy (NYSE: BTU  ) and Alpha Natural Resources (NASDAQOTH: ANRZQ  ) , which are focused on coal.

The biggest fear for investors remains that the long-term benefits have companies like BHP Billiton continuing to produce large volumes of the commodity. All the while, domestic producers like Alpha Natural Resources are having a hard time bridging the current struggles to reach the long-term benefits.

Global miner
The problem with investing in BHP Billiton is that stock returns are based more on a global economic recovery and primarily one based on strong Chinese demand. Any particular commodity has limited direct impact on the stock, particularly in the case of coal.

Despite the impact of coal on the financials, BHP Billiton has one of the better views of the commodity, with 20 coal operations spread across five countries. Last year, the company produced 154 million tons of coal from those mines.

For the last six months of 2013, coal accounted for a little less than 15% of revenue and 5% of earnings before interest and taxes. Revenue totaled $4.7 billion for the period, making it a substantial operation. But the totals far trail iron ore, copper, and petroleum, which all exceeded $7 billion in revenue for the six-month period.

BHP operations sum up some of the structural issues with coal. For the second half of 2013, the company increased metallurgical coal production to a record 22 million tons, while thermal coal matched the results of the prior year -- not exactly the production numbers one would expect with prices at multi-year lows.

Coal prices
Despite the long-term growth potential of coal, the short-term pricing issues are killing the stocks. According to The Wall Street Journal, thermal coal prices in Australia are trading near their lowest level since 2009, and metallurgical coal prices are near a seven-year low. The question is whether these extremely low prices will lead to a rebound in the sector. In the U.S., the natural gas market has already seen what happens to inventory levels when prices hit extreme lows.

These low coal prices in Australia greatly impact the domestic producers with the global nature of the commodity. Naturally, Peabody Energy is affected greatly with a substantial operation in Australia. More importantly, Alpha Natural Resources was designed to benefit from coal exports to Europe and Asia with the East Coast facilities it built and acquired via the Massey Energy merger.

Consequently, both stocks continue to trade near multi-year lows, while BHP is holding up better with a more diversified commodity operation. More importantly, BHP and Peabody Energy have profitable businesses to survive until the coal sector turns around. Alpha Natural Resources faces the greatest risk, with the company still generating substantial losses.

Bottom line
The BHP Billiton news might suggest good times ahead for coal miners. But these stocks are likely to continue sitting at lows for a while considering the most important news was the suggestion that coal prices would remain low for more than a year. Clearly, the coal operations for BHP don't move the needle, so the best way to play the long-term coal demand is Peabody Energy and Alpha Natural Resources. But first companies like BHP need to quit producing record volumes.

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  • Report this Comment On April 07, 2014, at 1:39 PM, preskeelpundit wrote:

    "But first companies like BHP need to quit producing record volumes."

    That sentence says it all. Why would BHP increase production of met coal to a record amount when prices are so low? Not a wise business decision, in my opinion. It only prolongs the low price cycle.

  • Report this Comment On April 07, 2014, at 4:09 PM, Matt8265 wrote:

    Coal stocks will double in less than a year. ACI and ANR at least. Due your DD and track natty gas and coal. I'm not going to tell you the answer.

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Mark has been writing for TMF since Dec. 2012 with a primary focus on taking advantage of opportunities provided by the market in the energy and tech sectors.

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