We recently added small cap coal stock Alpha Natural Resources, Inc (NYSE: ANR) to our SmallCap Network Elite Opportunity (SCN EO) portfolio as a short-term position despite the fact it has underperformed the Market Vectors-Coal ETF (NYSEARCA: KOL) along with President Obama’s “war on coal.” And while you might be leery of betting on a coal stock with almost four years left for the current administration to wield power, but there is a good reason why investors in small cap coal stocks like Alpha Natural Resources could be rewarded.
Alpha Natural Resources' Bet on Asian and Chinese Coal Markets
Alpha Natural Resources is one of the largest and most regionally diversified coal suppliers in the United States with mining operations in Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming. From these operations, the company supplies metallurgical coal to the steel industry and thermal coal to generate power to customers on five continents.
In the last earnings call, Alpha Natural Resources executives said that it won’t be until 2015 before you see projections of steel capacity coming up in Europe and the market for metallurgical coal remains fairly weak overall. It was also noted that the second quarter Asian benchmark price was at $172 per metric ton on an FOBT basis, up from $165 in the prior quarter, but recent transactions were being recorded around the $160 level. Moreover:
This weakness has been attributed to slowing seaborne demand from China along with continuing economic weakness in Europe. Any uptick in Chinese imports should lead to improved conditions for the seaborne met market going forward.
Later on in the earnings call, Brian D. Sullivan, Executive Vice President and Chief Commercial Officer, noted that US coal had gained market share in the Pacific in the 12 years ended 2012 and that:
…prices gained a third I believe of the increased cocking coal deliveries into Asia over that 12 year period. So we’ve already gained as a U.S. industry market share in Asia over the last 10 years.
Sullivan went on to note that Alpha Natural Resources has embarked on a program of getting in front of more Asian customers and they are trying to figure out how to become a core long-term supplier to the Asian region. He also added:
I think the U.S. industry is now just starting to understand the way that the Chinese buy raw material cyclically, and we think that as – if we look back on history, right now in the period of the bottom in raw material purchasing that corresponds to the peak in iron production. So, we learn as we go forward and continue to focus on Asia and we think we have assets that can dispatch into Asia at a profit sustainable.
It should be mentioned that Forbes recently had a lengthy article entitled: “China Wants To End Blackouts With Western Help -- And American Coal.” Basically, the article contains a number of interesting statistics about energy usage in China and that the country is still building one coal generator a month – including advanced coal generation generators like supercritical and ultra-supercritical plants which should calm some environmental worries over pollution.
Otherwise, it should be briefly mentioned that Alpha Natural Resources announced yesterday that it had temporarily suspended production at its Cumberland underground longwall mine in Greene County, Pa. due to “adverse geological conditions in the mine's headgate area.” Cumberland's management anticipates that it will be at least several weeks before production resumes. In addition, Alpha Natural Resources will next report earnings before the market opens on Friday, August 2.
Share Performance: Alpha Natural Resources vs. Market Vectors-Coal ETF
On Monday, small cap Alpha Natural Resources rose 0.54% to $5.56 (ANR has a 52 week trading range of $4.82 to $10.74 a share) for a market cap of $1.23 billion plus the stock is down 40% since the start of the year, down 27.1% over the past year and down 94.3% over the past five years. The Market Vectors-Coal ETF is down 26.6% since the start of the year, down 23.8% over the past year and down 66% over the past five years.
Finally, here is a look at the most recent technical chart for both Alpha Natural Resources and the Market Vectors-Coal ETF:
The Bottom Line. Again, investors need to be careful about betting on small cap coal stocks or the Market Vectors-Coal ETF for the long term. With that said, Alpha Natural Resources is one coal stock that is making a smart strategic move to figure out how to tap the increasingly important Asian and Chinese coal markets.
SmallCap Network Elite Opportunity (SCN EO) has an open position in ANR. To find out what other open positions SCN EO currently has, and to learn why so many traders and investors are relying on this premium subscription service, click here to find out more.