Buy Coal and Uranium?

[tylerrr]

Anyone else thinking of getting some positions in coal and uranium. I see huge potential for runups in next couple of years. For coal, i'm looking at Arch and BTU or maybe KOL.

Uranium could be bought with URA.

[Dave]

BTU was the first stock I ever bought (in 2012). I also bought JRCC (a very small player in the Illinois Basin). This was right out of college and I only had a couple thousand in them. I ended up losing money on BTU and making money on JRCC (before it went bankrupt).

At the time, I felt the industry was nearing a bottom. Boy was I wrong. It was a crucial investing lesson for me: I am not smart enough to figure out macroeconomic trends (I thought NG had bottomed and was going to rebound).

Most coal companies have tremendous amounts of operating and financial leverage, in addition to being dependent on the underlying commodity price, so the swings in profits and market caps are mind-blowing.

I have thought about getting back into BTU or another coal miner several times over the years. I believe the investment is binary: it will either be an investment with a 5x+ return on your money over the long-term, or it will go bankrupt.

Given that, I think it makes the most sense to invest in the coal company with the best chance of surviving this downturn (And yes, I do believe it will change, regardless of what the current administration is trying to do and what environmentalists are pushing for. I do not believe "this time is different.") At the individual level, this involves assessing cash drawdowns on current debt loads, to see who can last until coal prices go back up. The other approach is diversifying via KOL, which is probably the easiest and safer option.

I have a hard time putting money back into coal, because it is essentially impossible to value a business whose profits are so dependent on things outside of their control (regulatory cost, commodity price, interest rates). With that said, I do believe the risk/reward is very favorable here, given a long enough investing horizon. If I were more of an indexer/asset allocation guy, I think it makes a lot of sense to put some money in coal, keeping in perspective that it might be 5+ years before you see any money, and that it may be one wild ride.

[tylerrr]

yes, KOL is the safer bet.....Soros has also recently acquired coal positions. It's a contrarian play, which makes it exciting.

[Chad]

I like contrarian plays a lot. Thus, my current focus on emerging markets and oil. Coal looks like a more difficult contrarian play. While, it's still necessary and will be for a while:

China and Japan are building coal plants, but the US is not.
http://instituteforenergyresearch.org/a ... ding-them/

However, the Chinese plants appear to be unnecessary and just ways for local Chinese governments to gain revenue from unneeded power plants. Thus, the "China's Skyrocketing Coal Power" chart in the first article is highly suspect. Not surprising given that the first article is probably on an industry sponsored site.
http://www.nytimes.com/2015/11/12/world ... .html?_r=0

So, while I agree after the dust settles there will be winners within the coal industry. I think you will have to be really good at picking the winners, as the recovery won't be overly broad (this will eventually happen to oil too, but coal is further down the path). I have been looking at Consol Energy (CNX) as they are a little more diversified (coal and gas) and some big hedge fund guys like Einhorn are betting on them. However, I haven't bought them.

[tylerrr]

I like contrarian plays a lot. Thus, my current focus on emerging markets and oil. Coal looks like a more difficult contrarian play. While, it's still necessary and will be for a while:

China and Japan are building coal plants, but the US is not.
http://instituteforenergyresearch.org/a ... ding-them/

However, the Chinese plants appear to be unnecessary and just ways for local Chinese governments to gain revenue from unneeded power plants. Thus, the "China's Skyrocketing Coal Power" chart in the first article is highly suspect. Not surprising given that the first article is probably on an industry sponsored site.
http://www.nytimes.com/2015/11/12/world ... .html?_r=0

So, while I agree after the dust settles there will be winners within the coal industry. I think you will have to be really good at picking the winners, as the recovery won't be overly broad (this will eventually happen to oil too, but coal is further down the path). I have been looking at Consol Energy (CNX) as they are a little more diversified (coal and gas) and some big hedge fund guys like Einhorn are betting on them. However, I haven't bought them.

thanks for the info. BTU is a big company. I'd be surprised if their stock price doesn't provide an enormous return in time.....Kind of reminds me when everyone said HPQ was out for the count in late 2012.....I bet on them and made a nice return.

[Dave]

@Chad - Agreed.

That is an interesting note on CNX. I just checked and Mason Hawkins is #1 owner at 20% and Einhorn #2 at 13%. Big ownership from very successful investors.

Are you waiting for something specific to develop before investing in CNX, or still analyzing?

[Chad]

@Dave

I'm waiting for the coal and natural gas situation to play out more. Plus, I have more confidence in the increasing demand and decreasing cheap reserves of oil increasing the price of oil, than I do for coal and natural gas. I'm not suggesting coal and natural gas won't recover (neither oil or coal will probably see their recent highs without some major disruptive event like a significant war). Just that it may take longer than oil to recover.

All of them will see a recovery, it's just a matter of holding the investments long enough.

Uranium is interesting, but I don't have a lot of information on it other than a few articles about a potential lack of supply. I would need to do more research on uranium to form an opinion.

[Dave]

That makes sense.

The recovery timeline will determine returns, but that is a difficult thing to determine.

[Chad]

New article on China's coal plants/market:

http://www.bloomberg.com/news/articles/ ... toxic-smog

[Chad]

So, the major players have either declared bankruptcy (Arch, Alpha Natural Resources, Patriot Coal Corp, Walter Energy) or are probably going to declare bankruptcy (Peabody).

http://www.marketwatch.com/story/coal-g ... 2016-03-16

It's kind of fascinating to watch these big broad changes happen.

[jacob]

At this point I would say none of the above. Both have low EROEIs and neither have any kind of public/government favour. Coal kinda died with the introduction of shale gas. While shale gas is dubious as an energy source, it's less so than coal.---I think shale has pretty much killed any prospects for coal unless humanity decides to damn the torpedoes (climate change) and charge ahead. As for nuclear, it hasn't received any love for 50 years ... it's obviously not too cheap to meter. The stockpile is aging and getting irrelevant, so there's less "subsidy"/demand from the war department. We'd need to replace most powerplants soonish.

The current value bargains are refineries and distribution (PSX, KMI, ... ). If you want to speculate, the game is in upstream and integrated majors (COP, CVX, TOT, ...) For tangential bargains consider CMI and (less so) CAT. For entire countries, Australia (EWA) and Russia (ERUS).

Disclosure: I own COP, CVX, TOT, CMI, EWA, and ERUS. I'm strongly considering starting KMI and adding more TOT. CAT kinda scares me. These are not isolated picks though. I currently prefer to short dollars and invest outside the country unless it's a screaming bargain (e.g. CMI).

[Chad]

I couldn't agree more. Certain coal plays may be viable, but it will be very difficult to identify them. Coal is much more the "falling knife" than oil. Other than oil (KMI, EOG, XOM, etc.) and a few specific US plays (CMI, CAT, AAPL, etc.) the rest of my money is going overseas in various foreign funds (GVAL-heavy Russian lean, DVYE, PRIDX, PRASX, VEMIX, EEMS, etc.). No reason not to take advantage of the exchange rate and the better value in foreign markets.

[Sclass]

You know, CMI looked very interesting. I bought a small amount recently. I've been following it for many years and was shocked Into buying recently.

CMI is about as rock steady as the Cummins B design. The strategy can be seen in the very slow evolution of this workhorse and other engines they've designed and milked for decades. They start with a stable platform and incrementally improve it for decades. It's almost Japanese in mindset. Their success has put the other diesel manufacturers to shame. For years Mercedes sold just as many big rigs with CMI engines as MB engines.

Here is why I'm scared of them now. It has nothing to do with the numbers.

Paccar, their big customer for big rig engines has started selling a DAF manufactured big rig engine in the US called the MX-13. It looks very compelling from emissions, economy and reliability point of view. It actually looks like the next generation CMI engine block if CMI warped forward with their technology.

Additionally, RAM, the maker of the Cummins powered 2500 pickup is offering a VM Motori V6 turbo diesel from the Maerati Ghibli in the 1500. I've checked out the truck and it is amazing. it will undoubtedly erode the 2500 sales for those who can get away with less towing capacity.

These two power plants make up a good part of the CMI engines division. If these engines are any good they'll disrupt the slow and steady strategy of CMI engine development.

[jacob]

http://www.tylerpaper.com/TP-Business/2 ... r-clean-up ... one could imagine that if this happens a few times, companies would be required to insure.

[Chad]

http://www.tylerpaper.com/TP-Business/2 ... r-clean-up ... one could imagine that if this happens a few times, companies would be required to insure.

Another example of how the true cost of certain things are not actually accounted for in a free market.

[jacob]

https://www.washingtonpost.com/business ... story.html
http://www.modernreaders.com/wyoming-af ... enzo-tanos

[jacob]

Blankenship goes to jail for safety violations.
http://www.bloomberg.com/news/articles/ ... conspiracy

[Riggerjack]

. Another example of how the true cost of certain things are not actually accounted for in a free market.

Chad, that's not a free market, that is a highly regulated market. And that is how highly regulated markets ALWAYS work.

Feel free to complain about environmental costs being factored out, but at least acknowledge the fail was a regulatory failure.

A free market solution would be to give environmental cleanup priority in bankruptcy, and let the markets decide bond/labor/capital prices. But those premiums were split by regulators and regulated, alike.

[tylerrr]

KOL has a run up so far in 2016 of about 25%. I still say KOL is a good long because the ETF spreads some of your risk in the coal market. China, India, etc. are not going to go away from coal anytime soon IMO.

URA went up 5% today. Not sure about URA anymore.

[jacob]

And so it happened ...

http://www.npr.org/sections/thetwo-way/ ... bankruptcy