No volume to speak of, but someone wants a few shares of VOXX enough to pay $ 10. No news that I saw, and the volume is still under 10,000 shares. But kind of interesting.
That leaves exports. I was always taught that thermal coal can't be exported profitably; the shipping costs are too high, relative to the price of thermal coal. FELP has proved this wrong, at least in a small sample. It produces coal at $ 20/ton cash costs, and even after eating the shipping costs to New Orleans, it has been able to make money by exporting. But even now it's a really small market. And essentially, eastern coal producers can only sell to Canada, Europe and South America. Maybe if the Panama canal project ever gets finished, we can export to Asia, but even then we'd be competing with coal producers in Australia and Indonesia, where the shipping distances are much smaller. And unless Russia pulls the plug on natural gas shipments to Europe for political reasons, Europe hates coal as much as our government does.
So maybe I'm just in a bad mood, but I don't see any thermal coal revival in the US. I think ARLP/AHGP are good bets for the next year or 2 because their production is basically contracted; maybe FELP is a good investment, too, over that time period. I hope I'm wrong, but I see big problems in the 2016/2017 time frame, no matter who is the next President.
And NRP is in the middle of the problem, with all its CAPP reserves and met coal reserves. It really needs to do something bigger outside of coal (or maybe hold a conference call and tell people how it thinks its non-coal investments will do over the next few years instead of making us guess). Otherwise, the coal piece will keep dragging NRP down.
Just look at the big picture for thermal coal. In 2007, US electricity production peaked at 4,156,000 million kilowatt hours. It's tracking 3.5% lower than that this year, 7 years later. That's happening for lots of reasons, some good (better conservation), some bad (less US manufacturing, no matter what the government stats supposedly show), and 1 inevitable (the baby boomers like me retiring and using less energy). So in a zero sum game for domestic energy sources (I'll get to exports in a minute), coal either has to win share from natural gas, nuclear or renewables. I don't see that happening in my lifetime. I don't know how old you are, but I'll bet no one will see coal replace those sources unless fracking is totally banned and the price of natural gas increases. (And I'm not against fracking, BTW. It helps my non-coal MLP investments.) So for a particular coal producing region or company to do well, it has to steal share from other regions. So far, that has been the Illinois Basin's game, stealing share from CAPP. And in that effort, IB was helped by geology, geography and union labor. But we're entering the end game for CAPP thermal coal, except for sales to those utilities that are located within CAPP or next door, so transportation costs make a difference. I think this last for another few years, tops. Then IB needs to steal share from western coal, or export.
Since transporting coal costs a fortune, and IB coal is about 2 or 3 times as expensive as western coal at the mine, the only major market that IB coal can steal from western coal is Illinois, and that hasn't happened yet. If it does happen, then IB can thrive for a longer time. If not, all the expansion of coal mines in the IB will cause the price to drop and no one will make money.
Sorry, I'm too wordy for Yahoo again.
I like your comment about ARLP, but the last time coal generated 50% of US electricity was in 2003. That year, coal was at 50.8% and natural gas was at 16.7% of US electric generation. Nuclear was at 19.7% if anyone is interested. In 2013, coal had dropped to 39% and nat gas had increased to 27% of the total. Nuclear stayed flat at 19.4%. So essentially, nat gas picked up the piece that coal lost. And YTD 2014 (thru June) coal has ticked up to 40% and nat gas dropped to 25%.
And next year, when the 2015 coal plant closings take place, coal will probably lose another point or 2, and nat gas will probably tick up by the same amount.
It's funny actually. Fracking, which the environmentalists hate, has created cheap natural gas which has certainly contributed to coal's decline. Pick your poison.
So sometime in the next few years, the overproduction will kill pricing. It's started already in the spot market, but it won't affect ARLP until renewals come up for its contracts at a time when the overproduction is present.
This gets to your comments about the need to close mines. But as long as mines cover the cost of production and contribute something to cover overhead and interest expense, no one will close their own mines. And no one in the IB feels the need to close any mines, yet.
The only hope IB coal has long-term is if, now that it has replaced CAPP, it is able to displace western coal at Illinois power plants. Strange, but that hasn't happened yet, although Mr Cline has sure been trying. If that happens, the sky is the limit for ARLP and FELP because Illinois utilities use a whole lot of PRB coal. But if it doesn't happen, the miners will kill each other until prices come down to the cost of production.
So the pie is shrinking, IB can't continue taking share from CAPP for much longer, and will hit a wall unless it can displace PRB. And since miners won't close mines except as a last resort, we're going to see overproduction in IB that will kill pricing. Not an issue in 2014 or 2015, but by 2016/2017 it will be a big issue.
Anyway, I'm rambling so I'll just add one last comment. ARLP should finish its big cap expenditures when the 2 new mines open. If ARLP announces that it's done with new mines for a while, and just increases its distribution, I'll stick around. If ARLP announces any new expansion plans, I'm gone.
And NRP had better get a move on in its diversification efforts.
FWIW, I don't think any coal company has a long-term future. To be fair, I've thought that for a long time, and it has caused me to sell ARLP/AHGP from time to time, and every one of those sales was a mistake. But I still think so.
Here's my thinking: Illinois Basin has been taking market share from CAPP for at least 6 years now that I've been following coal. So while the overall market has shrunk, CAPP has shrunk even more and IB has grown. The reasons for this are many: IB coal is cheaper to mine (labor and the way the coal seams run make for way cheaper production costs); IB coal is closer to parts of the Southeast that use coal to produce electricity (like the TVA) so transportation costs to that region are lower; IB mines are often along rivers, allowing for shipment by barge, which reduces costs, especially for export shipment to New Orleans. There are others, but basically the idea is that while overall demand for coal has declined, IB has taken a bigger and bigger piece of the smaller pie. And ARLP has benefited from that, big time. They are really efficient operators and they seem to have great relationships with their utility customers. And it helps that they are just about the only coal miner that didn't over-leverage itself in buying out competitors at the top of the market.
So what's the problem? Everyone and his brother knows about the IB and is opening new mines there or expanding existing mines there or moving to longwall production methods to increase production there. ARLP has 2 mines coming into full production over the next 12 months: I think initial production from those mines is 10 MM tons per year, and production needs to ramp up from there to keep the mines profitable. FELP has incredible growth plans and could increase production by 30 MM tonsa per year over the next 5 years. Even little RNO is hanging its hopes on a new IB mine. And Murray, a private company, is expanding there.
I'll finish in the next post, if you can wait
"No bottom in sight for any of the coal companies"? ARLP and AHGP were up today. They've been hit the last week or 2, but nothing like any of the other coal companies. And CNX isn't doing too badly, although it's more oil & gas than coal now.
It's funny (but not if you own coal stocks for any length of time); if you ignore CNX because it's not mostly coal any more, the combined market capitalization of AHGP/ARLP is now larger than the next 2 largest US coal companies. AHGP is the GP of ARLP and all it owns is ARLP units and IDRs. So if you take the 2 market caps, and subtract the value of the ARLP common units owned by AHGP, you get a combined market cap of $ 5.9 billion. The next 2 largest coal companies are BTU ($ 3 billion) and FELP ($ 2.3 billion).
3 years ago, in early 2011, BTU's market cap was $ 20 billion, so it's dropped 85% in the last 3 years. Also in early 2011, ANR's market cap was $ 7.9 billion, so it's dropped 94% since then. I won't even look at the 3-year drop in market cap for ACI/WLT or the others. But ARLP and AHGP's market caps are just a bit higher today than they were in early 2011, and they are now America's largest publicly-traded coal miner by market cap. Also by net profit, but since only 1 or 2 miners are showing any profit these days, that's an easy comparison.
It makes you wonder (and worry a bit, if you own ARLP/AHGP like I do). At some point, FELP (or who knows? maybe White Oak, god forbid) will sign some crazy contract at just above its cost of production and destroy the Illinois Basin. And then you'll hear me whine. But I think that's classic economic theory p the cost of commodities eventually drops to the cost of production. If that's not the rule, I just made it up.
See - we saved you some money. We didn't talk to you and you didn't buy. So today's drop doesn't hurt you.
It's funny; I thought Goldman had reiterated its Buy rating on SXC today/yesterday. I didn't think GS mentioned SXCP. So why the drop? Met coal is dying once again today, but SXCP doesn't have exposure to that. The risk here is that the steel companies don't renew SXCP's contracts as they expire, or squeeze SXCP's margins as a cost of renewing. I haven't seen anything about that today. The volume is really low, though, so maybe the drop is meaningless.
See? Now we're talking - are you buying? :-)
I think the weakness in BTU and ANR are the result of Goldman's comments. I think both names were already rated "Sell" at GS, but today/yesterday GS said the risk was still to the downside in those names. GS said there was 48% downside risk to ANR's 2015 consensus EBITDA and 17% downside risk to BTU's 2015 consensus EBITDA which could scare anyone out of owning those names, even at today's prices.
They didn't mention CLF to my knowledge, but they said all sorts of bad things about met coal, and over the last day or 2 there have been even worse comments about iron ore, which is CLF's basic business and which is related to met coal.
I stole this from a post on Investor Village, but that poster probably copied it from somewhere else so it's OK.
Goldman Sachs cut its 2015/16 met coal benchmark price projections to $126/$142 per MT (from $140/$147 per MT). With this in mind, analyst Neil Mehta sees downside for Peabody Energy (NYSE: BTU), Alpha Natural (NYSE: ANR), and Arch Coal (NYSE: ACI). "Key drivers of the lower price forecasts include: (1) slower than expected steel production from China ytd; (2) potential for greater than expected supply from major producers including Australia, Mozambique and China; and (3) continued cost deflation shifting the global cost curve lower," said Mehta.
The metric ton pricing would equate to $ 114.50/$ 129 per US ton. I assume that pricing is for high grade (low vol?) met coal, because the average met coal price reported by many US producers is in the $ 80s range, which I assume reflects (1) transportation expenses to wherever the benchmark price is set and/or (2) quality issues. Lots of lower quality met coal can be used for steam as well. But anyway, GS thinks we haven't hit bottom yet and they are still negative on companies with lots of met coal exposure.
NRP is getting there, but I wouldn't say it's "hardly a coal company" yet. The company pointed out in August that since the start of 2013 it has invested $ 550 MM in non-coal operations. That includes debt incurred and new units issued to fund the new acquisitions. But NRP currently has a total enterprise value of $ 2.8 billion. So considering cost, it's around 20% non-coal. To be fair, the non-coal operations (at least OCIR and the oil & gas working interests; it's too soon to tell about Vanta) are worth more than they cost, so maybe the non-coal stuff is worth a third of the total value. The way coal values are dropping, maybe the non-coal operations could be worth more, if NRP was careful in buying the new stuff. But I don't think it's there just yet.
And the problem is that the coal royalty business has profit margins and cash flow margins in the 80% and up range. We don't know the profit margins on Vanta yet, but we do know the OCIW margins. They're nice, but they aren't 80% or anywhere near it.
So until NRP does a transformative deal (like PVR once did with Chieftain) it will be tied to coal for a while.
The sellers accepted $ 36 MM of NRP units for about 18% of the purchase price. The units were valued at $ 14.835. That's a discount to the price of the units on the day the deal was announced, but obviously a premium to today's price. I assume the pricing of the units was agreed to in August, but I'm still puzzled as to why NRP didn't disclose the pricing until today. The rest of the purchase price was funded thru NRP Operating Company credit facility, which carries a floating interest rate. For the first half of 2014, the average interest rate on that facility was 2%. Presumably, just like with the last 2 acquisitions, NRP will replace the facility with longer term fixed rate debt.
ANR's CEO gave a speech today (yesterday maybe?) in which he said that there's a chance that only 2 US major coal companies will survive. At least that's what the headline said. Actually, he said that only 2 to 4 would survive. I don't know if he included ANR in the survivor group. The story did point out that ANR is the second largest US miner after BTU. In the same speech he said that ANR would be interested in buying met coal mines if the price were right. Maybe in this context "right price" means someone will pay ANR to take the mines of their hands.
The "Rockefeller" you refer to is the Rockefeller Brothers Fund, a tax-exempt foundation, whose goal is to "advance social change that contributes to a more just, sustainable, and peaceful world. The RBF’s grantmaking is organized around three themes: Democratic Practice, Peacebuilding, Sustainable Development, and three pivotal places: New York City, Southern China, and the Western Balkans." The "sustainable development" part is illustrated on the RBF web site as fighting greenhouse gases and climate change mitigation. It doesn't sound like the kind of place that ever invested in fossil fuels, and certainly not coal.
And if you track down the RBF's investments (Dec 2012 is the latest date available), it doesn't own any individual stocks or mutual funds. It is fuilly invested in hedge funds and private equity funds, so it can't sell any individual stocks. And less than 3% of its hedge fund/private equity fund investments had the word "energy" in their names. And RBF didn't say it was going to get out of energy; it just said it was going to exit coal and tar sands investments currently. I'd bet they didn't have anything invested in coal or tar sands. So I think the announcement was just public relations.
Per the eia.gov web site, the price of NYMEX thermal coal was $ 60 at June 30. It closed yesterday at $ 52 and change. The volume that is listed on the web site is always minimal, so take the exact prices with a grain of salt. But the trend is there. I think the price quoted is for CAPP.
Actual coal prices depend on numerous factors, including the energy content, the chemical content. the location, etc., so that production from a particular mine can get priced at a premium or a discount to NYMEX. Also, Illinois Basin is always cheaper than CAPP. I'm just pointing out the obvious - the pricing increases that resulted from last winter's harsh weather seems to be gone.
A very long time ago, Terra Nitrogen's name was Agricultural Minerals something or other. That was when the controlling 75% interest was owned by a company named (guess what?) Agricultural Minerals. Then Agricultural Minerals (the corporate GP) was acquired by Terra Industries, and the MLP's name was changed to Terra Nitrogen. Then, CF acquired Terra Industries and its 75% interest in TNH. So if the CF/Yara deal goes thru, it will be the third time that TNH's GP has been acquired. Other than a name change, nothing else changes.
I think we're talking about the same Canadian coal deal. You subscribe to the Wall Street Journal too? I saw the reference there and then did a few searches on Yahoo Canada's web site.
Not much detail, but one of Mr Cline's companies purchased a 75% interest in an underwater met/thermal coal mine in Nova Scotia last month. Underwater in this case means that the coal bed is actually under the sea. I think is actually part under dry land and part under the sea, but it sounds better to just say the mine is underwater. Really weird story and I can't find out how much he paid for the reserves. Apparently, Canada (the government, that is) built out the mine in the 1980s and then abandoned it before any production came out. The property reverted to the province who sold it to private operators, one of which was Glencore, one of the biggest mining companies in the world. Glencore just sold its 75% to Mr Cline's company. Assuming they can get the coal to dry land, the mine is close to a deep water port for shipping the coal to Europe.
Interesting story, anyway. At least NRP didn't buy the reserves.
ANR updated its closing plans on Friday. Out of the 11 mines that got WARN notifications, ANR is closing 3, keeping 1 open, and extending the WARN period for another 60 days at the remaining 8. I know that adds up to 12 mines, I think maybe the 3 that are being closed only counted for 2 mines in the original notice; I think they might be 2 mines at 1 mining complex. Also, an ANR subsidiary has immediately shut a very small met coal mine.
I can't be sure, but based on the counties listed, one of the closed mines might include NRP's Kingston mine. The location is right, but It's impossible to be sure without a lot more research. I'll wait for NRP's 10-Q and see if they say anything.