I just scored a 40% return on one of my stocks in about three months, and I feel confident in saying that similar opportunities abound within the sector in question. But to catch the next big breakout stock, you first need to boldly go where few Fools seem inclined to venture.
I've been doing my level best to keep a spotlight focused on the metallurgical coal market for quite some time now, and I have to say it can be disappointing to see how unpopular the sector remains with retail investors. Even as a ruthless correction slammed the met coal miners this summer, I observed no increase in bullish sentiment after several stocks retreated by 50% or more over recent months. I am hopeful that the 70% advance in shares of Grande Cache Coal (OTC: GACHF.PK) on Monday will serve as a timely wake-up call for Fools to position themselves to profit from the ongoing tsunami of resilient global demand and resulting consolidation that's washing over this undervalued sector.
How I scored my 40% gain
Covering coal stocks for The Motley Fool, I've enjoyed a front-row seat in witness to the remarkable long-term growth story underlying the global market for metallurgical coal. A sudden case of the jitters regarding China's growth trajectory -- coupled with increasingly realistic economic outlooks in the U.S. and Europe -- contributed to an exodus from bulk commodities that has left some astonishing stock valuations in its wake. In a nutshell, I remained quite skeptical that Peabody Energy's
After all, as recently as mid-July, Peabody had extended its glance further ahead with a powerful 10-year forecast calling for 500 million tons of incremental met coal demand! That's a figure to stagger the imagination, and a similarly resilient outlook by the coal market gurus at Joy Global
Some of the vehicles I selected -- particularly those struggling Appalachian producers, including Patriot Coal and Alpha Natural Resources
All the signs were there, even if they had gone overlooked by an indifferent equity market. As a backdrop, we had a string of major transactions targeting Australian coal during 2011, featuring Rio Tinto's
How you can outperform my 40% gain
Because the noteworthy 70% premium offered for Grande Cache's shares would appear to make competing bids unlikely, the window of opportunity has probably been slammed shut with respect to that one met coal play. But I encourage Fools to carefully scour the sector for some stocks that could yet yield a similar or even greater return over a relatively brief span. By far my favorite remaining prospect within the sector holds a majority interest in a well-studied property within that same Peace River Coalfield in British Columbia that has clearly garnered the attention of some major operators. Because that stock has dipped deep into micro-cap territory, I will refrain from identifying the company by name, but I am confident that Fools will discover the stock in the course of their own due diligence.
My second-favorite met coal play, meanwhile, is Cline Mining. This budding new producer is busily ramping up production at the New Elk coal mine in Colorado, with a view toward reaching 3 million tons by 2013. In fact, Cline's 2012 production target of 2.75 million tons would place it ahead of Grande Cache's anticipated output of 2.2 million tons for its current 2012 fiscal year! What's more, Cline's measured and indicated resource of 388.5 million tons at New Elk easily exceeds Grande Cache's corresponding cache of 300.8 million tons (measured and indicated resource). Although variations in the precise characteristics of coal products can render direct comparisons of the sort rather problematic, I can't help but to discern compelling value in the notion that Cline's stock would need to advance by more than 200% just to reach the per-ton valuation implied in the recent bid for Grande Cache. When you toss in the $40 million in cash Cline just acquired by monetizing its Lossan deposit, the prospect turns sweeter still. Investors in the U.S. will find Cline Mining trading on the Pink Sheets under the symbol CLNMF.PK, and I strongly recommend a closer look.
In closing, I would remind investors that U.S. coals still have an important role to play in satisfying the enormous demand that will continue to emerge from China, India, and key emerging economies over the next decade or more. For those like me who truly adhere to a long-term perspective even amid remarkable near-term volatility, I believe that gains far in excess of 40% will result for investors building stakes in quality U.S. coal miners during this dramatic correction. After gobbling up the Voldemort of coal stocks -- Massey Energy -- Alpha Natural Resources now trades near its worst levels of the 2008 financial crisis. In part because the resulting entity is an absolute behemoth for met coal production, I consider Alpha Natural Resources a reliable double from here for Fools who are prepared to wait patiently for such a gain.
Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Alpha Natural Resources, Cline Mining, Grande Cache Coal, Patriot Coal, and Peabody Energy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.