Is It Time to Abandon Coal Miners?http://www.fool.com/investing/general/2013/09/23/is-it-time-to-abandon-coal-change-title.aspx Joshua Bondy
September 23, 2013
China has banned the construction of new coal plants around Beijing, the Yangtze Delta region near Shanghai and in the Pearl River Delta region of Guangdong. Also, the EPA is hoping to decrease the amount of greenhouse gases that power plants can release and make coal more expensive, though these new standards will not be set in stone until June 1, 2015. These changes are putting pressure on coal miners, but some are better positioned to endure the pain.
The positive news
The world's disdain for nuclear energy has boosted coal demand in many nations. In Japan alone the top six utilities are hoping to boost their coal consumption by 24% in 2013 and 2014. It is easy and cheap to take coal, put it on a boat and ship it across the Pacific, but the same cannot be said for natural gas. In 2011 high LNG costs helped push Japan into its first trade deficit in 31 years.
One miner to avoid
James River Coal (NASDAQ: JRCC) operates a number of older mines in the Central Appalachia region where it made an average of $1.74 per ton in the second quarter of 2013.It is practically impossible to run a profitable company with these numbers. The company does have some Midwest assets with better margins, but the bulk of its production comes from the Appalachia region.
Going forward there is no reason why James River Coal would stop being a risky miner. It is a high-cost producer with very low gross margins.
The middle ground
This firm's debt load is also a positive. It has a total debt to equity ratio of just 0.7.It is important to note that at the end of 2012 only 16% of its reserves were found in the cheaper Powder River Basin.
Overall Alpha Natural Resources is a medium quality miner. The majority of its operations are found in expensive regions, but it is has strong export capacity and in the long run it will be able to gain better prices for its coal.
Arch Coal (NYSE: ACI) has traditionally maintained strong margins, but the Appalachia region is hurting its bottom line. In the second quarter of 2013 the company posted an operating margin of $-4.68 per ton in the Appalachia region.
The company's other assets in the Powder River Basin and the Western Bituminous region helped to even out its total earnings, but nevertheless there are hidden risks. If the company continues to lose money in the Appalachia region, it will need to close down mines and cut its costs in all areas.
Its balance sheet is another negative. The company has a large debt load and a total debt to equity ratio