One way to make money in stocks is to buy the one thing that everyone hates.
The current U.S. mantra is that coal is the scourge of the universe. The rest of the world disagrees.
This dichotomy has led to yet another government induced phenomenon of “unintended consequences.”
The United States has been blessed with the most abundant, highest quality coal in the world — and yet our political class has determined that we can’t have it.
Meanwhile, global demand is creating a surge in profit opportunities…
Here are the top four headlines yielded from a Google search for “coal”:
- Arch Coal 3Q Net Up 85% As Surging Volume Fuels Revenue
- Coal Division Again Drives CONSOL to Record Revenue, Totaling $1.319 Billion
- Mitsubishi Raises Profit Forecast as Coal Prices Gain
- Cliffs Natural Resources Inc. reports 400% increase in third-quarter earnings
Forget the global banking crisis, the looming bear market in bonds, or fears of a double dip recession…
There is a booming bull market in coal!
There is a constant and increasing demand for coal coming from China and India, two countries whose booming population use coal for everything from cooking food to making cars.
Some 70% of China’s electricity production is fueled by coal, and its steel mills are fed with coking coal.
Despite having vast quantities of dirty coal, the Middle Kingdom became a net importer of the commodity a year ago. Imports for the first three months of 2010 jumped more than 220% to over 44 million metric tons.
Meanwhile, global M&A activity indicates that prices will remain high. Thermal coal prices — the type used in 70% of Chinese power plants — surged to more than $115 per metric ton in recent days.
Coal is booming in India as well…
Coal India, a former state-owned company, will IPO on the Bombay Stock Exchange on November 4th in the third phase of its going public. It is the largest coal producer in the world, and was 15.28 times oversubscribed during phase 2.
Uncle Sam hates coal
One of the great ironies in the world is that the United States has the world’s largest supply of quality coal, and yet, despite the fact that it will burn troops and treasure to maintain its oil supply, has hamstrung its coal production with excess regulation.
In fact the state of West Virginia sued two federal agencies on Wednesday, seeking to reverse stricter controls on mountaintop coal mining adopted in 2009 by the Obama Administration.
We are at a stage in which the Chinese will buy coking coal from West Virginia, assume the costs of shipping it halfway around the world, use it to make steel… and then ship the finished product right back to us.
That it is fiscally feasible to do this is the insane reality of our times.
The world beats a path to West Virginia
The Charleston Daily Mail reported this week:
… Companies from Russia, India and the Ukraine have bought more than 1 billion tons of West Virginia’s most valuable coal reserves during the past two years.
The companies have targeted highly valued metallurgical coal, a key ingredient in steelmaking. And most of the metallurgical coal in Central Appalachia is found in southern West Virginia. The purchases have also included reserves of steam coal, which is used to produce electricity.
A case in point
Fleeing U.S. regulation, Peabody Energy has formed a joint venture (JV) with China’s Winsway Coking Coal Holdings to explore and develop coal prospects in Mongolia.
The deal comes after the Chinese firm acquired emerging miner Polo Resources’ 50% interest in the Peabody-Polo Resources JV for $35 million.
The new JV, called Peabody-Winsway Resources, holds coal and uranium licenses in Mongolia, and is conducting an active exploration in the South Gobi region.
Peabody President Richard Navarre said, “The agreement between the two parties would further expand Mongolian coal exports into the high-growth China market.”
Winsway was the largest buyer of Mongolian coking coal last year.
I recently recommended one Mongolian coal company that’s selling Winsway all the coal it can produce. It is increasing sales from 200,000 tonnes in the third quarter to 1 million tonnes in the fourth.
Another Mongolian coal company I recommended a few months ago to readers of my Crisis and Opportunity is already up 300%, and is valued at around $10 per ton of coal. The upside is large.
It’s time to forget about the overwhelming bearishness in America and Europe.
Go where money is treated best.
There is an underground coal boom going on. No one is talking about this.
Now is the time to get in.
Energy and Capital