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TOPIC: Coal

Coal 5 months 3 weeks ago #1

  • jimbud
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I've been speculating on the now bankrupt Peabody junior bonds. I haven't purchased a large position, but think that coal is so hated right now that I would like to be getting long. I am aware of alternative energy sources, and the potential for solar/wind/Natural gas to displace coal for some power generation, but am wondering if any of the other macrovoices people are thinking similarly. Is there an Art Berman in the coal market? Are any of you folks looking at metallurigical coal?
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Coal 5 months 3 weeks ago #2

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Rick Rule likes coal. These comments are from his Real Vision encore interview, beginning at [42:22]:

"Everybody hates coal. But coal utilization is increasing. The narrative is: Obama, carbon, smog. The truth is: steel, and the lights going on. The idea that the coal industry, which provides 30% of America's baseload power, will continue to produce a couple hundred million tons a year losing 20 or 30 dollars a ton, is a non-starter."

"If your readers believe that five years from now when their car wears out, that they'll be able to buy a new car, then they believe in metallurgical coal, because if you didn't have metallurgical coal, you wouldn't have steel side for cars. If you ask people if they think the coal price is gonna go up, uniformly they say no. If you ask people if they think they'll be able to buy a car in six or seven years, uniformly they say yes. And there's an irreconcilable dichotomy in those two points of view."

"I am making very, very, very long-term bets on iron ore. I'm trying to buy iron deposits that have had two or three hundred million dollars spent on them, that won't be economic until the iron price doubles, where I can buy 'em for a million or two million dollars, and then warehouse 'em for ten years. I love to be places that other people hate."


I posted some other quotes in the Real Vision encores thread. He's not wildly bullish short-term on base metals or energy, but he perceives incredible value amid a bottoming process.
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Coal 5 months 3 weeks ago #3

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Hi,

Yes, Rick's interview helped me refine my view, I was just wondering if anyone else who listens to macrovoices has also been looking at coal or had found someone very knowledgable writing about it.

Regards,
jim
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Coal 5 months 3 weeks ago #4

  • ErikTownsend
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Eric Janszen, who used to run the iTulip.com site, had a lot to say about coal. My understanding is that he';s no longer actively writing/doing much with iTulip, but the site is still there so far as I know. You might find his views interesting assuming they're still there.

Personally I don't have a strong view on coal, mostly because I don't know enough about the electric generation infrastructure. Nat Gas used to be used primarily for PEAK power generation, but not BASELOAD, because coal was cheaper for baseload in almost all cases. The big advantage of nat gas was that that it was easy to turn the gas turbines on or off to meet peak demand, whereas the coal-burning process is much more involved to start-up or shut down.

Now NatGas is way cheaper than it used to be, and despite the current shake-up in the shale patch, I think it's reasonable to expect NatGas cost to stay low (compared to before the shale revolution) for years to come. Does that put Coal at risk of obsolescence because clearner-burning natgas no longer costs way more per KWH than coal like it used to? Beats me, I don't know enough about it. But that's where I'd start if my goal was to develop an opinion on coal: first understand the relative attractiveness of coal vs. NG and then integrate your view of where shale is headed from here. NG is definitely more attractive than coal from an environmental standpoint.

Best,
Erik
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Coal 5 months 3 weeks ago #5

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Erik,

Thanks for your comments. I went and digged around on iTulip, and didn't find much recent. I think coal utilization in the US for power will continue to decline...but that in other parts of the world it will continue to be useful.

For example:
www.bloomberg.com/news/articles/2016-06-...wer-source-from-2019

I'm at the poking along stage--I bought some of the pre-bankruptcy Peabody bonds mainly so I would pay attention to the position, and because I figured it had a decent risk-return profile.

Regards,
jimbud
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Coal 5 months 2 weeks ago #11

  • blackgold
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Hi Jim,
I have been long on coal for a while... However I have picked my marks...

Look for coal producers with low unit cost, low sulphur and phosphorus content output...

My mark has been whitehaven coal in australia - high quality coal, very low cost and close to key markets for sea born coal...

Am a big fan of markets getting smashed and over sold which results in supply shortages down the track...

Interested in your thoughts!
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Coal 5 months 2 weeks ago #13

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BG, Whitehaven looks quite good. It looks like it has a number of relatively high grade deposits, and has had a decent move off its bottom earlier in the year. Have you done a deep dive on its cost of production and delivery to key markets like Japan, China and India? I suspect that Natgas in the US will continue to depress the market for coal.

Do you have a feel for how their BS looks, especially debt and debt repayments? Peabody would have made it, most likely, had it not acquired in Australia in 2011 taking on huge debt to do so.

Regards
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Coal 4 months 3 weeks ago #21

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yep their unit cost is in the $50s AUD per tonne which gives them a fairly profitable business in current terms given the coal price rally of late
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Coal 5 months 3 weeks ago #6

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Here's a quality article on coal. Very bullish perspective.

thecrux.com/porter-stansberry-the-single...n-opportunity-today/

My thoughts: it depends on time frame of investment.

In the short term, I really don't think there's any reason to be bullish on coal. There are massive amounts of Nat Gas Available in the Marcellus/Utica alone, the market continues to be flooded and the $5/MMbtu target they mention is a pipe dream in the short term. It would take a massive global *cooling* (keep in mind most argue for global warming) to increase demand enough to have any effect, and supply would most likely easily match, especially with any lead time.

In the long term, it is *possible* though not probable that coal prices rise again. Realistically, you'd be betting that solar/wind other renewable's cease to be subsidized and technology doesn't improve quickly enough to bring costs down to the point where (cost per MWh of solar - perceived benefit to society of saving the environment) > cost per Mwh of coal. You'd also be betting that fracking technology doesn't improve (*hint hint, it will*) to make natural gas more cost effective than coal.

In addition, you'd be fighting what i see as the most investable trend over the next 30 years of "health". People want to be healthier and continue to be healthier and that's going to continue to grow and coal is in direct opposition to that.

If you do want to bet on coal, BTU is a great way to do it, i remember reading a piece on them from Christian Zann of Balyasny a while ago and they were his coal pick. Personally, I'd go with the equity. Either their going to go bankrupt and they'll both be worthless or coal will come back, but i HIGHLY doubt that it'll be time to save the current bond issuances. Plus, if coal really returns you'll be glad you don't have the capped upside of the bonds.

TL;DR version: coal is a long term, long shot, but if you wanna bet on it buy BTU's equity.
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Coal 5 months 3 weeks ago #7

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Thanks.

It also depends on who wins the next election.
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Coal 5 months 3 weeks ago #8

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Ummm. Long BTU common is no longer possible, as it is BTUUQ. That's what happens to the common when it declares Chapter 11. My reasoning on the earlier investment (I bought the common debt at 19-20, and it's trading at 14-15 now) was this:
Lehman liquidated at somewhere nearly 20% value of the bonds on minimal real assets--it was originally estimated at 11 and had the USG tailwind to make it more valuable in liquidation than I had thought it would be.
Had BTU survived as an entity (arguably, it could have had the senior bondholders not pushed for chp 11, or at least run for another year or two without a shutdown) it was a 5x return.
One bond payment would have lowered my basis materially, but that did not happen.
If it failed, I could sell at what I figured was a 50% loss, or take my chances with a re-org.

I am good going long the common post-restructure, so long as they do not sell all of their non-power coal assets.
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Coal 5 months 2 weeks ago #9

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Coal 5 months 2 weeks ago #10

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I'm well aware of what happens to companies in bankruptcy. You can still buy stock of bankrupt companies.

I don't care if the ticker is BTU or BTUUQ that semantic wasn't the point, the point is if you actually believe in coal long term you'd want to be on the equity of a coal company.

If you just think BTU (how I refer to peabody generally, not just the common stock) will sell its assets and have only enough to repay its bonds, bet on the bonds, but that is not a bet on coal, that is a event driven strategy.

I agree with your assessment & your strategy, and it appears like you've done a basic asset valuation in your analysis of the Lehman liquidation as well as weighed the risk/reward of the trade, i was simply addressing your question of what do you think of coal.
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Coal 5 months 2 weeks ago #12

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Michael,

Thanks for the clarification. From the huge amount of debt Peabody had, conventional wisdom is that the common will be valueless--after all, the unsecured debt I first went into was pricing in an 80% haircut. I have been assuming/hoping it will convert into equity post Chapter 11.
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Coal 5 months 1 week ago #14

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Howdy,

Have any of y'all done a deep dive on the price of solar without government subsidies? I was somewhat surprised to see that Abu Dhabi had a lower price point than coal, at least according to this article.
www.bloomberg.com/news/articles/2016-06-...wer-project-in-dubai

OTOH, Abu Dhabi probably does pretty well in % of the days available for power generation.
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Coal 5 months 3 days ago #15

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Whenever I take a position, I look primarily for things that don't support my core thesis. With coal, it's relatively easy to find things that say it will never come out of the ground. In the course of doing that, I've found a number of links that might be interesting to other macrovoices subscribers:

www.statista.com/statistics/265638/distr...roduction-worldwide/
Interesting to me to see how much coal China produced last year. It is in the process of taking lots of smaller mines out of production, and is not building any more coal fired plants (at least in theory).

www.bloomberg.com/news/articles/2016-06-...uels-for-electricity
Bloomberg has recently come to reflect its owners positions a bit more than it did 10 years ago, but if this article is correct, the New Energy Finance team has estimates which could throw a monkey wrench in the works for both natgas and thermal coal.

Some other coal facts (maybe just for me to remember as I model the market):

It takes between 0.5 and 0.6 metric tons of coal to produce a metric ton of steel.
2015 steel production (per Wikipedia) was 1.6 B metric tons, so somewhere between 800-900 M metric tons of metallic coal was consumed.
Roughly 8 B metric tons of coal was produced in 2015, so assuming no net increase in coal storage, metal coal makes up about 10% of the global total.

Next thing to address: How much Japanese nuclear reaction capacity is going to remain offline indefinitely, and how will that affect the coal market?
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Coal 5 months 9 hours ago #16

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Increasingly I see the next president will be Hillary, so I don't know if coal is a good investment.
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Coal 4 months 3 weeks ago #17

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tankumo wrote:
Increasingly I see the next president will be Hillary, so I don't know if coal is a good investment.

Not sure I agree or disagree with your political prognosis, but I do believe that there is great value in being a contrarian.....I also think that like other materials, there may other applications where coal finds a home.....seems to me the infrastructure for mining and the availability it so high that there must be people working on other uses.....of course, like the buggy whip industry of today, that industry will likely be far smaller......but those who have a need / desire for buggy whips might actually be better customers today than back in the hay-day of the horse.

Big fish in little sea is not always a bad thing......

But this new sea has still not been defined......so is totally speculative to me.
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Coal 4 months 3 weeks ago #18

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If we want to play coal, might as well play uranium, for sure deficit in supply/demand is coming, it is already happening actually.
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Coal 4 months 3 weeks ago #19

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I have interest in Uraniium too, but there are two important things for me on that Uranium:
1-I can't find many public companies that seem to have reasonable controls/finances etc.
2-Japan is going to be buying coal moreso than Uranium over the next few years, and that should skew demand.

FYI, BP has a great review of global coal demand and prices:
www.bp.com/en/global/corporate/energy-ec...oal/coal-prices.html
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Coal 2 months 2 weeks ago #23

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A follow-up on the peabody bonds that I bought--purchased at 0.2, traded down as low as 0.03 (wish I had done more research, I might have felt comfortable buying, as that was funds not wanting to hold Peabody anything into their annual reports), currently in the 0.23-0.24 range. Wish I had the dexterity of blackgold on wHC....
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Coal 4 months 3 weeks ago #20

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Since my original post earlier re Coal, and Whitehaven Coal in particular, I have been in and out of it several times with a 50% profit.

Essentially WHC is a short term bet for me. High quality asset that will be able to take advantage of good seaborn coal demand in the short term - particularly in Asia (Japan and Sth Korea in particular) which are relatively short boat rides from NE Australia where most of WHC's mines are located. But I think longer term (ie post five to ten years), coal is a dumb investment). Mankind being the stupid creature it is, has delayed and avoided the existential crises that is climate change for the last thirty years - be it through ignorance, the power of money and its influence on policy or just plain willful neglect. So for me, the day is coming when the tough decisions will probably be forced on us - not by the economics of energy cost, but by the economics of climate change mitigation - ie the cost of building dykes, flood mitigation - and in some cases - the wholesale relocation of populations. Like any risk analysis there will be best case and worst case and a spectrum in between... The fact that the best case costs wont be insignificant, let alone consideration of worse case scenarios, will force policy makers to finally pull their fingers out. And coal will be the first victim given it's CO2 emission per BTU and increasing marginalisation politically as the big miners continue to sell down out of coal.

Post coal, my bet is Natural Gas as it produces only about 2/3 of the CO2 per BTU that coal does. And, from what I have read in research, a lot of the modern coal power stations can be quickly converted to Gas (think like your BBQ)... BTW would be interested if anyone knows about this stuff in detail...

So when I hear statements like we have a glut of gas coming - I am not sure that is going to be the case. However i need to do the analysis on current global supply and demand for gas and if the demand profile includes base load power generation... Anyone interested in helping??
Last Edit: 4 months 3 weeks ago by blackgold. Reason: spelling
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Coal 2 months 2 weeks ago #22

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I am curious about the global demand for natural gas as well--I think the LNG production out of the US could be very interesting, as well as other countries once fracking happens on a more global basis. How do you want to approach the market demand/supply side of things?
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