is not going away anytime soon. Everybody is cutting production and almost everybody is priced for bankruptcy. Opportunity of a lifetime? Just imagine when flora(as in flora and fauna) gets a few seats in the Senate and tells everybody how much they love carbon dioxide… The founder of Greenpeace already rants about how the World would be a better place with more carbon dioxide. Four times as much actually…

Seems like the ultimate contrarian play…it’s a “given” that coal as a power source will be regulated out of existence.

Slow decline in demand here in the US, but actually still growing World wide, even with China’s apparent change of heart, right…

It’s been a contrarian play for a few years now and it’s been torture on longs. Peabody has been pushing that same theme you mention for years and it’s been a losing battle. I don’t know the US producers too well but many of them not only have large debt balances that they can hardly service (can’t cover interest payments), but they also have large underfunded DB plans and major post retirement benefits they’ll owe. Peabody has been viewed as a leader in this industry and they’ve got 5-year CDS trading at nearly 1,600 bps. All of this debt and post-retirement benefits kind of spell bankruptcy for many of these companies.

Competition with natural gas has been murderous on them, too, especially in Appalachia where Marcellus production is very impressive and at low cost.

Yes, it’s all negative so sounds like a good contrarian play but I think the leverage is what’s the concern with most of these guys – they’re headed toward bankruptcy. I think they’d get a nasty short covering rally if we have a hot summer, but I wouldn’t be a long-term, contrarian buyer in any of these unless I felt confident that bankruptcy wasn’t an option.

When would you buy a representation of say 90%, market cap weighted, of the US producers? Or maybe just CLD. They have a strong balance sheet. Someone will ultimately make a lot of money in Coal, assuming it continues to be mined, no? There has to be a price. Certainly closer to recovery than a “few” years ago.

I agree. Being early or being wrong can be the same thing. Paulson wasn’t the first to see the housing market collapse, he just timed it right. Those that were early probably went broke.

I was going to mention Cloud Peak, but I’m not an equity guy so I don’t want to make it seem like I’m making a call on someone, but I think Cloud Peak will be a survivor just like you. Their stock has been hammered lately, too. I don’t think the bankruptcy stuff plays to them. Good call and I agree with you on that.

There are oil and gas companies drilling successfully in the Powder River Basin and northern Colorado region; getting good oil and NGL’s (though that’ll slow down), along with dry gas as a by-product almost so they may face competition from gas too but it won’t be like Appalachia and the Marcellus.

Cloud Peak would be the one I’d buy gun to my head. They are making investments in export capabilities off the west coast – it’ll be a while but could work out for them.

Is it important to compare future supply of coal to the price of oil, gas, or other energy sources?

Definitely. Powder River Basin coal is competitive at today’s prices against natural gas. Extraction costs of less than $10(shipping is a much larger cost though) per ton. But it would be a play on gas prices increasing, a very leveraged play for sure. Safe to say gas has been killing most coal companies, but cld is just about a prb pure play. Need expensive mines to close. Happening now.

I don’t think it is a good idea. NG is so cheap and is going to be cheap for a long time, and solar is getting cheaper everyday, there just may not be a big role for coal in the future. It’s not just about the carbon dioxide, you will not want more methyl mercury and other goodies in your air and water.

I don’t disagree. I just don’t think it happens overnight. King coal will rise once again before it’s all over. Can you just let me know when? Thanks.

  1. Prices are going to remain suppressed at least through 2017 becaues China is in oversupply (particularly with met coal) and expanding, the US is increasing regulation on thermal coal which continues to hurt the demand going forward and ensures new plants will not be coal fired, and demand has been waning on the met coal side due to economic activity and on the thermal side due to the price of nat gas. Cost of production is one factor, leverage, formed from buying assets when coal was at elevated pricing is the other. Is there a coal investment somewhere that makes sense? Maybe. But you’re fighting gravity, I’d focus my time elsewhere.

Peabody is actually a company i am looking at. It will be a few more months when the stock turns around. I’d wait. And i agree with the OP, coal is not going away anytime soon.

I’ll circle back around in 6 months and check in on this.

how do you know that coal won’t go away? It has known health risks and its alternatives are getting cheaper and cheaper…I don’t see how coal can stay…

Also, he completely ignored the ramp up in Chinese supply which operates with state support under lower regulation.

Disclaimer: I cover the metals and mining sector

Peabody is rough. Consensus estimates on Bloomberg don’t have them covering their interest until 2018 and even then it’s tight. There’s gotta be a some nervous bond holders out there.

No it won’t. Due to regulatory changes that come in full effect (I think 2020), people are having to retool and rebuild systems to use ‘cleaner’ energy. There probaly is some niche coal play, but the commodity over all has seen brighter futures. Perhaps coal in China is a better bet. The negative catalyst to coal is the positive catalyst to NG

Don’t tell me you moved to the buy side and starting talking like this so quickly. Please no. . .

We shall see. There’s a lot of natural gas supply out there in North America when/if prices rise. I think the Marcellus was a game-changer for coal, and it’s not going away anytime soon. There’s also lot of dry gas acreage where drilling will ramp up quickly if natural gas prices rise much above $4/mmbtu outside of PA/WV/OH. These oil plays like the Permian – they aren’t just producing oil. Around 20-35% of the hydrocarbon production is dry gas in a lot of areas in those plays so they are getting dry gas even when they don’t want it. Only the Bakken and small sections of the Eagle Ford are true oil plays – all others in the US produce meaningful amounts of dry gas, too. I don’t think LNG will raise natural gas prices much if at all – any increase in demand from LNG will be met with supply that is sitting there waiting to be drilled (there’s a lot of it).

These wells do deplete quickly, so if capital markets tighten up drilling activity may slow and prices may rise but you probably don’t want to be long coal companies (or other risk assets) if capital markets get bad. If we start getting extreme weather conditions consistently in the summer/winter that may give a reason for rising prices. In 10-15 years, things may be different but I think in the next 5 years any rise in nat gas prices in North America will be met with new supply pretty quickly.

Black Swan. Have you any recommendations for a solid, low volatility investment in metals and mining, or commodities more generally? Liquidity is not an issue. In fact, happy to take an illiquidity premium if one is available.

This is a very good point. I do expect this to happen. Not only energy prices will go up, but also commodity prices.

short $KOL , long $TAN