The government's proposed carbon dioxide rules are tough, but Joy Global (NYSE:JOY) thinks they provide important clarity. Moreover, the bad news is now priced into coal. That could make now a good time to buy for more aggressive investors.
Bad for coal
Joy Global CEO Ted Doheny didn't mince words when asked about the new CO2 rules for utilities: "So it's not good for coal." That said, he went on to add, "But it's been out there, it's been planned on." And, thus, the newly proposed regulations provide important clarity to what has been an open question mark for some time.
Doheny did a quick back-of-the-envelope take: "looking at the worst-case scenario, what that would mean to electrical production on coal and all way out to 2030, we calculated what that would mean, roughly taking 180 million tonnes out of the U.S." However, factoring in exports, "a net effect on that, which is 15 years out now, is probably a net 80 million tonnes differential."
That's not a huge fall, and it will probably come from smaller independent miners that don't have the resources of giants like Peabody Energy (NYSE:BTU). And this international coal miner explains exactly why things could be better than they seem today: productivity.
Closing the dirty ones
Peabody Energy notes that the current U.S. coal fleet runs at about 60% of capacity. That's not a big number, especially when compared to nuclear, which runs at roughly 90% of capacity. Essentially the oldest, dirtiest, and least efficient coal plants are the ones that are going to get shut down. Joy's Doheny sums it up: "really those more efficient plants, those coal burning plants are the ones that are going to be loaded up."
Peabody Energy believes the remaining coal fleet will be pushed to around 80% of capacity. In fact, over the next couple of years, Peabody Energy believes demand for Powder River Basin (PRB) and Illinois Basin (ILB) coal will actually increase roughly 100 million tons. That number includes 60 million tons lost to utility plant retirements.
Peabody Energy has been positioning itself for this for years, since its primary U.S. exposure is to the PRB and ILB. And since nearly 75% of its coal in 2013 was U.S. thermal, this bad-news-is-good-news scenario could help turn Peabody Energy's fortunes around once the competitive advantage that large players have shines through.
That said, it's been a rough stretch for coal and Peabody Energy. The miner has lost money in five of the last six quarters. A big part of that red ink, however, is related to Peabody's Australian steel coal operations, a division under intense price pressure. For example, U.S. revenues were up year over year in the first quarter on an 8% improvement in coal sales. Aussie revenues were lower on roughly flat coal sales. Coal prices were lower in both areas, but U.S. demand is obviously not going away.
Joy is ready, too
So, Peabody Energy is positioned to do better in a changing U.S. coal landscape because of its basin focus. But, so is Joy Global. For example, the company noted during the first quarter that its PRB service business was showing signs of strength. But the bigger story is Joy Global's shift toward "hard rock" equipment.
On that front, the company recently paid $51 million for the hard rock assets of Mining Technologies International. Commenting on the purchase, CEO Doheny said, "This acquisition represents an exciting opportunity as we execute on our growth strategy to expand our underground mining product lines into the hard rock markets including nickel, potash, palladium, platinum, gold and copper."
Putting those two points together: The U.S. coal industry should provide a solid service base to help support Joy Global's shift into new areas. And, despite the global downturn in most mining markets, Joy Global hasn't lost money in over a decade.
So, for aggressive investors, Peabody Energy might be a good way to buy into an eventual coal rebound. However, Joy Global could be a way for less adventurous types to participate, too.