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Why Investors Worship Old King Coal

by: Edward Silver May 18, 2008 | about stocks: ACI / ANR / BTU / KOL / MEE / WLT    

Edward Silver

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Coal producers are riding high for an industry that a growing throng of Americans wish would just go away.

Year to date, shares of Arch Coal Inc. are up 41%. The biggie of the industry, Peabody Energy Corporation (BTU), has waxed 24% -- and 94% from its August trough. A broader measure of the sector's stocks, the Market Vectors Coal exchange-traded fund (KOL), has advanced 26% since its January launch.

All this bullishness is based on the dark rock’s own surge in value. Benchmark prices for some grades of electricity-generating steam coal are more than $100 for a metric ton, double September’s price. Metallurgical coal, the type used in steel making, has tripled in some contracts.

Oil attracts the anger and the ink, but coal, mined here in the U.S., has joined the club of rudimentary resources blessed by the energy crisis.

What we are paying up for is the dirtiest fossil fuel in the ground, infamous for wielding a heavy hand in the planet’s warming. In Beijing they wear surgical masks to ward off the soot from coal-fired plants, which drifts across the Pacific to further foul the air over Los Angeles. That’s not all. Black lung disease, mercury and sulfur emissions and the ravaging of Appalachian mountaintops are part of the legacy that keeps our lights on.

Coal provides about half the electricity in the United States, though not in California, where natural gas, another fossil fuel, claims a larger share. Nuclear power contributes 20% of the U.S. power total. Hydroelectric has a small role, while solar and wind -- sorry, environmentalists -- thus far account for less than 1% of the total. These wannabes are doing everything they can, including stalking the halls of Congress, to outmaneuver the out-of-favor incumbent.

Coal’s edge, though, is that it’s still the low bidder when it comes to costs, despite the recent run-up in prices. Also, everything needed to radiate coal-fired power all over the map already is in place, not only the generating stations but storage, transit and integration with the grid. On both accounts, solar and wind have plenty of work to do.

Naturally, few Americans want to see a coal plant built in their backyard. In many cases, politicians want them far away too. Kansas Gov. Kathleen Sebelius, a Democrat, made news when she vetoed two power plants to spare her state 11 million tons of additional carbon dioxide emissions annually. Calls for legislation to bill emitters for their carbon-burning privileges are gaining traction. Even Sen. John McCain of Arizona, the presumed Republican presidential nominee, is on board. Likewise, interest is rising in hoped-for technological fixes, including a complex blueprint known as carbon capture and sequestration.

With so much resistance, coal plant construction has ebbed in the U.S. Be prepared for brownouts.

"Utilities know there will be some kind of legislation and a carbon-capture mandate, but there are no requirements yet or price tag associated with carbon," said Ann Kohler, an energy analyst with Caris & Co. "Regulators are looking at natural gas, renewables, nuclear. There are a lot of unknowns. Utilities that have started construction are moving forward, but otherwise, plans are on hold" for new coal-burning plants.

There are no such misgivings or hold-ups in nations that are in a hurry to catch up with the West. China and India have especially voracious appetites for coal’s cheap energy, and the supply deficit may persist for years. This winter, that imbalance suddenly became an emergency, partly the effect of Australian floods and Chinese blizzards that shut down mines. Charging into the breach, U.S. coal exporters are finding famished markets, happy to make hay on prices driven skyward by scarcity. The anemic dollar is a bonus for their bottom lines.

Fossil fuel investors, rejoice. But what an opportunity for renewables! Yet solar, wind and other renewables aren’t nearly ready to dethrone Old King Coal, particularly overseas. In fact, if green alternatives do eventually curtail coal’s dominion in the U.S., it’s not hard to imagine the industry thriving on the tobacco model: ostracized at home, welcomed around the world.

As for the stocks, Kohler rates Massey Energy Co. (MEE) a buy for its concentration in metallurgical coal, the sweet spot of the market. She expects earnings per share to expand from $1.17 last year to $3.05 this year and $4.13 next year. Alpha Natural Resources Inc. (ANR) and Walter Industries Inc. (WLT) also are well-positioned in metallurgical coal.

Peabody’s shares, meanwhile, now may be too rich to risk money on, Kohler said, based on past valuation ratios.

The whole group, however, won’t for long be enjoying these lofty prices for their output, Kohler believes, and that may inject volatility into their financial results. Mining is recovering in Asia, and prices per ton are likely to settle back to elevated but not aberrant levels. Any shortages in China tied to this week’s destructive earthquake are expected to be short-lived. Furthermore, Kohler foresees a rebound in the dollar.

Although today the market for the grimy mineral is ablaze, change is coming, so keep your eye on these canaries in the mine: Prices could ease along with the supply crunch. Emitting CO2 may get expensive, likewise the technology to capture it. Consumers are unhappy about their electric bills and foul air, and the political class wants to try out a host of new regulations. Cleaner alternatives are clamoring for their chance.

But for now, coal miners are doing business like there’s no tomorrow.

Photo: A coal mine in Trevorton, Pa./Associated Press

Disclosure: none

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This article has 18 comments:

  •  
    May 18 07:33 AM
    Interesting article.
    The coal lobby in Washington considers solar and (to a lesser degree) wind energy to be insignificant and do not mind DOE support for these areas. However, the White House, through its budget office, did force the DOE to cut all R&D funding on geothermal energy, effectively to $0 in 2007.
    This is because many studies show that a little R&D investment in geothermal powerplants (now generally at 7-9 $ cents/kwh) offer the opportunity of clean abundant electricity through the grid at costs of 4-5 $ cents/kwh.

    The U.S. geothermal industry experiences "dramatic growth surge" with expectations that total power production (currently 3 million U.S. homes) could triple over the next few years.
    GEA together with Ormat technologies (NYSE:ORA) and Glitnir Bank will host a workshop on july 23 in NYC to introduce geothermal energy to the NYC financial community.
    Among the present: Google
    Google announced that geothermal energy will be one of their focus areas for new investment.
    More info: geo-energy.org

    On this website there are articles on how you can profit from the coming boom in geothermal.

    Reply
  •  
    May 18 12:34 PM
    I like the possibilities of geo thermal. It seems so convenient. However, latest info from geologists indicate geo thermal sooner or later will cause earthquakes and they don't know why yet.

    France killed a geo thermal project in the last few years on the Swiss Border due to quakes in Basil.
    Reply
  •  
    May 18 12:58 PM
    Mr. Ward....Did the French kill the project 'because it may cause quakes', or because a 'quake might kill the project' ??? Just curious... I too like geo-thermal.... Just look what it is doing for Iceland... Don't understand why Hawaii doesn't take advantage of it...

    Thx jegan
    Reply
  •  
    May 18 01:30 PM
    How about gasoline from coal. I know it is feasible and Germany did it during ww11. Shut down NASA and us those scientists and engineers who are fuel specialists to work on this project instead of wasting money to go back to the moon or go mars.
    Reply
  •  
    May 18 03:05 PM
    Dear Mr. Ward.

    Induced seismicity by human activity is a phenomenon in all engineering projects such as coal mining, drilling for natural gas and oil, tunnel construction, reservoirs of large hydropower dams etc.

    Actually coal mining caused the largest such incident in Australia.
    news.nationalgeographi...

    The management of the Basel project made the mistake of not clearly communicating that such a mild tremor would occur.

    The greatest risk of tremors is generally understood to be the attempted underground storage of large amounts of CO2 from coal-fired powerplants.

    Of course tremors are only a problem in seismic active areas and geothermal powerplants need not be built there at all.

    However, there is a good amount of scientific evidence that geothermal energy projects of this kind, actually reduce the risk of tremors in such areas by releasing tectonic pressure, wich makes sense to me.

    The German government was 'not amused' by the Swiss miscommunication and it is my understanding from Berlin that all 70- 80 EGS geothermal projects will go ahead as planned as "geothermal energy offers enormous potential for the future of germany's energy mix".

    The U.S. has much better geothermal resources than Europe.

    For political reasons i will not comment on the French project.
    Reply
  •  
    May 19 01:26 AM
    One of the largest geothermal operations in the world is in northern California, called the Geisers, owned and operated by the " new" Calpine Corp. Which also owns a large fleet of nat gas plants throughout the country. Just out of Bk waiting for 50 million warrants to expire in late Aug. This geo complex supplies power to the grid and also powers most of the coastline of northern Cal. shares are at 21.33 and could be an excellent long play if the feds mandate green power.
    Reply
  •  
    May 19 05:54 AM
    Terrible article. A lot of meaningless comments too.

    Most coal stocks and mining stocks have price to book ratios over 3 and pay dividends less than 3 percent. Everyone thinks that these stocks will keep going up and up and up.

    The same with solar and wind. What we need are companies that pay investors a decent return on investment today...not next year or in ten years or 20 years.

    As for the "new" Calpine. That's as good as the "new" Enron. Anyone on this site lose money in Enron or the "old" Calpine?

    There are too many writers on SA that write stories with inadequate information to properly determine if a company will return a decent profit to shareholders.

    I would like to see more articles on companies that pay a current yield of ten percent with capital gains potential as well.
    Reply
  •  
    May 19 06:31 AM
    Mr. Silver uses the phrase "fossil fuels" an awful lot, as do most people. I would direct him and every one else who is interested to
    this excellent work on where oil and coal actually come from: "The Deep Hot Biosphere: The Myth of Fossil Fuels," by Dr. Thomas Gold.

    Rebeldog
    Reply
  •  
    May 19 07:09 AM
    Zero air emissions coal plants coming..as small as the size of a house ..no smoke stake either.
    boston.bizjournals.com...
    Reply
  •  
    May 19 09:27 PM
    In theory all energy could be equally valued by its potential net btu output. Coal may be cheaper because there are secondary and toxic effects related to its use that are not factored into its immediate cost. If we compared "clean coal" to solar or wind would it still be less expensive? As long as we are willing to pay for coals effects by way of higher health costs and a diminished environment it will seem to be a better value. But is it?
    Reply
  •  
    May 20 07:50 AM
    The reference to global warming should be offset with a comment that we are now cooling and will continue to cool. As global warming comes off the table (provided those devoted to this religion can actually acknowledge facts) coal will be even more attractive.
    Reply
  •  
    May 20 04:05 PM
    If you want to have cheap aluminium , you probably should not complain about Chinese and its aluminium production that is dependent on coal supplies. American coal companeis are eager to export coal to China to help them produce aluminum for themselves and keep aluminium prices down or the Chinese will need to start importing aluminium from the rest of the world and push aluminium prices all way up like they did to copper. Take your pick: coal stocks or aluminium stocks aka ALCOA....They are really hard at work on keeping aluminium prices down by keeping Chinese supplied with American coal. The Cheney vice administration must be preferring high coal prices over high aluminium prices because his home state Wyoming is the Numero Uno in coal production!!! You hippies environmentalists are clueless, right? Duh?
    Reply
  •  
    May 20 04:09 PM
    The Bush Adminstration is gung ho about high energy prices, high steel prices but not high aluminium prices. Aluminium can do a lot to save energy by making automobiles lighter. We are not doing much lately. We are merely rooting for about 50 pounds increase on every automobile on average of aluminium while boosting automobile steel content by hundreds of pounds. We need to build smelters to offset the heavy rusty steel content in automobiles. You hippies environmentalists are clueless, duh?
    Reply
  •  
    May 20 04:11 PM
    about one pound of aluminium can do the job of two pound of steel in general when made into goods.... you hippies environemntalists are clueless, duh? One pound of aluminium is three times bigger than one pound of steel! You hippies environemntalsits are clueless? duh??????
    Reply
  •  
    May 20 04:12 PM
    yo hippies environmentlaist hoo boy!
    Reply
  •  
    May 20 04:13 PM
    Water vapor is the chief ingredient of greenhouse gases not carbon dioxide!!!! This is a big lie to keep steel industries alive...
    Reply
  •  
    May 20 04:15 PM
    Water vapor comes from millions of catalytic converters under automobiles made after 1975 as part of pollution control programs enacted by EPA. This is probably why we are experiencing global climate change as of lately... It was probably not coal it was probably becaouse of catalytic converters in millions if not billions of cars worldwide already. Come to think of how much water vapor are being generated by catalytic converters???? Millions of tons if not billions of tons of water vapor !!!! You hippies environmentalists are clueless, right?? duh?
    Reply
  •  
    May 20 04:20 PM
    Coal powerplants are not allowed to spew soot and particulates anymore except in China and India ?? It is called flyash and there is a giant vaccum with a giant bag employed to capture the flyash before releasing the emissionis in every coal powerplant in America and others. Yes there is a big vaccuum that suck the coal smoke to capture flyash. Flyash are then mixed with concrete to make it stronger. The Romans used fly ash to mix wiht concrete which is nothing new. What is new is reductions of sulfurs in coal powerplants with the scrubber systems in coal powerplants. The Daddy Bush Adminstration signed the bill to reduce the sulfur emissions in all coal powerplants back in 1990's. We are not hearing about acid rains anymore cuz much of the sulfurs are being controlled now.
    Reply
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