Coal for your Stockings

Desperate times call for desperate measures.

In a surprising move, Germany announced it would restart coal-fired power plants and offer incentives to companies to curb natural gas consumption. The move comes following news last week that Russia curbed some of its natural gas exports to the country. 

Russian energy giant Gazprom said the natural gas delivery delays were due to issues with turbine engines, but it is obvious that it is ramping up pressure on Germany and its energy-dependent economy. 

Germany is led by the environmentalist Green Party. The party placed the reduction of fossil fuels at the center of its platform.  The announcement reminds markets about the difficulty of transitioning from fossil fuels to alternative energy solutions. The legislation affecting the use of coal is expected to be approved on July 8. 

The Netherlands and Austria joined Berlin as Europe looks to remove Russia’s influence on their economies. The Death of Coal may have been premature. 

Coal Processing Plant

The news comes as coal prices have skyrocketed in recent months. Coal stocks have silently been some of the best performing names in recent months. Valuations remain cheap which suggests they could have further to run. 

We want to keep coal names on the radar for potential volatility. Here are a couple of names to watch.

  • Peabody Energy (BTU)
      • The coal company advocates for sustainable mining and clean coal technology. 
      • Jefferies upgraded the stock to Buy from Hold on June 7. The stock rallied 14% in reaction to the news.
      • Higher coal prices mean revenue growth and improved cash flows. 
      • Shares are up 117% TYD but still only trade at 41.x forward earnings. That will look even cheaper as the company reaps the rewards from higher coal prices. 
      • Shares are trying to fight through and establish ground above its 50-sma ($24.73).
  • Alpha Metallurgical Resources (AMR)
      • A mining company that produces and sells met and thermal coal in Virginia. 
      • Stock is up 137% YTD and is up an incredible 644% from its 52-week lows.
      • On June 3, the company paid the remaining $100 million principal of its term loan, eliminating its long-term debt. 
      • AMR reported record net income and EBITDA in Q4. 
      • This has been the focal point of a short report from Spruce Point who has expressed concern over the viability of its reporting. 
      • Shares of AMR slipped below the 50-sma ($156) on June 13 and have been unable to regain that territory. If you are looking for a short in the space this would be a name to attack. 
  • Arch Resources (ARCH)
      • The company produces and sells thermal and metallurgical coal from surface and underground mines. 
      • Jefferies upgraded ARCH to a Buy and placed a $225 target on the company on June 7. 
      • The stock is up 78% YTD and trades at forward earnings of 4.7x. 
      • This is a 22 million float with a 22% short interest. 
      • The company reduced its debt to $315 million from $547 million over the past year. It has $318 million of cash so it holds a net cash position on its balance sheet. 
      • Another coal name battling the 50-sma ($162). The stock has been trading in a tight range ($150-175) since late April. These are the key levels to watch for either a breakout or breakdown.
  • Teck Resources (TECK)
    • A Canadian diversified mining company which deals in gold, copper, lead and silver in addition to coal.
    • Shares have not been as volatile as the stock is up 27% YTD. It is up 97% off its 52-week lows from last July.
    • CIBC raised the company to a Buy and placed a target of CAD $70 (Approximately $50 USD) on June 15. 
    • TECK is using the recent surge in its stock price to pay down debt as it recently announced a tender offer to purchase outstanding notes. 
    • The stock trades at 6.4x forward earnings. 
    • The stock is consolidating in the $38-46 area over the past three months. It has solid support at the $36 area. With shares trading at $38, you have a well-defined risk if you were to enter the name. Put your stops at the $35.50 area. A break of that level would suggest you are on the wrong side of the trade.