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Coal ETF Tries to Emerge From the Abyss


After a 27% year-to-date tumble, it might be hard to find positive things to say about the Market Vectors Coal ETF (KOL). In fact, some investors may be ignoring the downtrodden ETF altogether as seemingly insatiable demand for coal from China, India and other developing nations has not helped prop up KOL this year.

Ignorance may not be bliss in the case of KOL because the ETF has climbed 8% since the start of July. How many investors have noticed is up for debate, though the fund did gain 2.3% Tuesday on volume that was well above average. [KOL's Collapse Turns Nasty]

KOL got a lift after Peabody Energy (BTU), the fund’s fourth-largest holding, reported a second-quarter profit of 33 cents a share, far better than the five-cent loss analysts expected. The good news for Peabody also helped boost shares of rival Consol Energy (NYSEL:CNX), KOL’s second-largest holding. Combined, the two stocks represent 14.2% of the ETF’s weight.

Walter Energy (WLT), one of KOL’s most beleaguered constituents, soared 4.4% on heavy volume Tuesday. However, Walter fell 1% after-hours and headlines that underscore the risks associated with getting too bullish too soon on coal stocks. [Walter's Woes Plague Coal ETF]

Last month, shares of Walter sank after the company pulled a planned $1.55 billion credit refinancing plan. Although Walter’s second-quarter metallurgical coal output was about 2.9 million metric tons, about 7 percent more than, the company slashed its quarterly dividend to a penny a share from 12.5 cents as a condition for amending a $2.73 billion credit pact, reports Simon Casey for Bloomberg.

Walter closed Tuesday with a tempting 3.7% dividend yield, but with the dividend cut, the stock will now yield less than 0.3%. Making KOL’s recent rise potentially dangerous is coal miners share something in common with their gold brethren: Falling prices could erode profits. [Gold Mining ETFs Soar]

However, gold prices are rising, bringing much needed relief to those miners. Last month, FBR Capial said met coal prices have fallen to a point where they will no longer cover cash costs, even for low-cost producers and the firm metallurgical coal prices could fall to their lowest levels since 2009, according to Street Insider.

Metallurgical, or coking, coal is a key ingredient in the production of steel and integral part of the production equation for many KOL holdings, including Peabody and Walter. That says KOL will need a sustained bounce in met coal prices to enjoy a sustained bounce of its own.

Market Vectors Coal ETF

ETF Trends editorial team contributed to this piece.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.