Friday, July 25, 2014

Moody's Comment on Met Coal Market and U.S. Miners' Cash Burn

Article mentioning Moody's comments:

BHP Billiton, the world’s largest miner, recently announced record metallurgical coal production of 45 million t for the year to June 2014 on the back of record Australian production. A further 30 million t of capacity is due to come online over the next three years in the country from projects that have already started or preparing to commence construction.

This growth will offset any capacity curtailments in Australia in the next twelve months and will lead to growing exports after that, said Moody’s. As a result of this continued downward pressure, Moody’s expects only a small increase in prices to US$135 – US$145/t by the end of 2015 with prices struggling to rise higher than that for three years after that.

At that level, Moody’s believes US miners will continue to struggle: “We believe that as a group, key US met producers [including Peabody, Alpha Natural Resources, Arch Coal and Walter Energy] will [burn] well over US$1 billion in cash in 2014.” Only when benchmark prices reach the US$160 – US$170/t range will the group become cash positive.


theyenguy said...

Coal Mining Companies are relics of the bygone era of cheap credit. Having been zombified by debt, the coal mining companies, are zombie companies, walking dead men; and are economic legacy assets, that is investments which can no longer provide capital return.

This inquiring mind asks, are Coal Mining Companies, CLD,B TU, WLT, ANR, OCIR, ARLP, CLF, ACI, NRP, WLB, AHGP, HNRG, and RNO, short selling opportunities?

Josh H said...

I think shorting the coal index is okay, but I would do further due diligence on individual names.

For instance HNRG has been my largest holding for the past 6 months (up 50%+ and has more room to go IMO). I did recently trim it on this latest move, but it is still a large holding for me. HNRG has no debt, although the recent acquisition will require some debt. Management is really conservative, will only open a new mine with a firm pay or take contract.

Most of the other coal names are garbage. I think the only other name that is interesting on your list is CLD, mostly because it is a pure play on thermal. Another name off this list (recent IPO) is FELP.

Met coal could take 3 years or 5 years to turn around. Thermal took 3+ years to turn around and it was helped tremendously by this past cold winter. (in my opinion) thermal was working its way to a recovery but could have taken another year.

CP said...

What does a "met coal" turnaround mean to you?

Can the "perfect storm" of Australia floods and irrational Chinese demand really occur again?

Josh H said...

I would say a turnaround is when mines previously closed might re-open. The general consensus would be that high cost mines have become profitable again.

A turnaround doesn't mean that price needs to return to an all time high, there was a perfect storm. Met coal can turn higher because of cost cutting. It always amazes me how much belt tightening can occur when the focus is required. We are seeing that now in coal as well as gold/silver miners.

One comparison that is relevant (to me at least because I got beat up being long MOS) is potash pricing in 2007-08. There was another perfect storm and potash has not returned to those highs since.

There will be a time to buy met coal names but there have been people trying to buy WLT at 50,40,30 etc.

I'll wait to see an actual turn. I might miss the move from 5 to 10, but I also missed all the losses from not buying at 30.

CP said...

I don't see the current equity of WLT surviving a restructuring. At a minimum, they need to do some highly dilutive equitization of the unsecured debt.

Josh H said...

I don't see WLT surviving either, but never say never. In the next few weeks (when I have more time) I do want to look at a bunch to see if it is worthwhile to short. Plus a couple of my holdings have done well so I now have some capital available. (I have been trimming HNRG for instance on the move higher, but still very bullish.

I know people will say too late should have done it earlier, but 3 to 0 is still 100%, same as 20 to 0.