looking for a reason to stay long ACI.. please help
I am currently long ACI but have a few concerns regarding my position
ACI has 1BLN in cash and 4BLN in debt. They are barely cash flow break even. If they were raking in positive cash flow, I would not be terribly concerned. But with coal pricing not making an aggressive rebound, we could have break even or even negative cash flows for quite sometime.
ANR has 2BLN in cash and 3BLN in debt.. They are decently cash flow positive.. Although, ANR is valued at almost twice what ACI is.. So i believe their stronger balance sheet is already reflected in the share price.
Why should someone be buying and holding ACI at these prices? I understand that in a stabilized coal market, ACI is tremendously undervalued. But we do not know when or IF the coal market will stablize. WIth ACI's current balance sheet and barely breakeven cash flows, why should anyone buy other than to speculate?
Please provide your professional opinion and correct me if any of my facts above are wrong.
The problems with coal profitability are all about low natural gas prices. In 2013 natural gas prices will rise above $4 mmBTU because of production cutbacks by natural gas producers and annual depletion of shale wells of 30 - 50%. Take a look at the United States Natural Gas (UNG) message board for a discussion of the issues.
As natural gas prices rise then utilities substitute coal for natural gas raising coal sales and price per ton. Concerning quarterly profitability for coal companies, this process takes a quarter or two to play out. However as an investor you will see a turnaround in the stocks as natural gas prices rise on a sustained basis.
It should be noted that the breakeven price for natural gas on an average marginal basis is about $5 mmBTU. Today it is about $3.60 mmBTU. The natural gas companies need $5 natural gas prices to be profitable and will reduce drilling until prices achieve this level.
ACI will benefit greatly as natural gas prices rise. Coal will remain an important source of US energy and will increase the share of electricity production in the US in 2013 versus 2012. The shorts have driven the coal stocks into the ground with a ridiculous assault based on coal is dead, but the tide will turn in 2013.
ACI is more of a thermal coal play, and ANR leans a bit more towards met coal.
Both are very good buy right now. Both are operating cash positive.
In Q4 2012, after taking off the one time items, the operating result of ACI was that it lost $0.60 per ton of coal sold. That is a very small margin of loss. It only takes coal price to go up just a little bit for ACI to be very profitable. And indeed coal price has gone up quite a bit from average level in Q4 2012.
Stock price wise, I prefer ACI at current price much better than ANR. I would propose putting 3 part of money in ACI versus one part of money in ANR.