Were Friday's Big Coal Winners a "Right Idea, Wrong Stock" Situation? (ACI, JRCC, and ANR in Focus)
If you're wondering why Arch Coal Inc. (NYSE:ACI) and James River Coal Company (NASDAQ:JRCC) are flying through the roof today, it's not because of anything either company said or did. Rather, the market's taking a proverbial ball and running with it.
Most likely, JRCC and ACI are being spurred by this report from Wall St. Cheat Sheet, which was an explanation of a report recently published by the International Energy Agency. In simplest terms, though the pace of the increase in coal usage between now and 2017 won't be as brisk as the pace of coal's growth over the past ten years, it will still at a fast enough pace to make coal almost as often used (on an equivalency basis) as oil. The interesting twist? Coal usage is projected to increase in every region over the next five years, with one key exception - the United States. In the U.S., coal continues to falter as natural gas supplants it.
The dots traders are connecting: If other parts of the world are going to use more coal rather than less, then American coal mining companies that can effectively access outbound seaports should be able to replace tapering U.S. demand with increasing foreign demand.
Unfortunately, that's easier said than done. Few American coal mining operations have easy (or fiscally viable) access to maritime shipping channels. It's a logistical headache for all these companies, but it any of these mining names were going to benefit from (and get a boost today because of) growing foreign demand for coal, it wouldn't necessarily be Arch Coal Inc. or James River Coal Company. It would more likely be a name like
Alpha Natural Resources, Inc. (NYSE:ANR), which was up a more modest 2.6% on Friday. ANR has more of its mining operations closer to shipping terminals in Virginia and Maryland.
To be fair, Arch Coal has operations in Virginia, West Virginia, and Maryland as well, giving at least a portion of its sources a shot at cost-effectively selling to overseas buyers. ACI also has significant mining operations in Illinois, Utah, Wyoming, and Colorado too, which isn't near any shipping terminal.
As for James River Coal Company, it's slightly better positioned to ship overseas from the East Coast; most of its mines are found along the southeastern portion of Kentucky, bordering Virginia (which has shipping ports). Still, the trip from eastern Kentucky all the way to the coast isn't a short one. Besides, Standard & Poors said at one point that though foreign demand for metallurgical coal may be firm, met-coal prices won't likely be high enough to offset JRCC's abnormally-high mining costs. The company's small size also means it's less flexible than larger competition; the ability to efficiently get coal to a port is the least of its worries.
In simplest terms, though the coal industry may have hit a bottom, Friday's leaders - if indeed prodded by growing foreign demand - may be the least deserving names in the group.
James E. Brumley is a paid contributor of the SmallCap Network. James E. Brumley's personal holdings should be disclosed above. You can also view SmallCap Network's complete disclaimer and disclosure.
Do NOT buy or sell JRCC, ACI or ANR until you have read everything.
SmallCap Network provides comprehensive research and opinions on JRCC, ACI and ANR. |
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| Date: | May 24, 2013 | |
| Price: | Free | |
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