Another giant U.S. company is going broke.
Arch Coal (ACI), the second-largest U.S. coal producer, filed for bankruptcy yesterday.
Coal prices have dropped 98% since 2008, causing a major crisis for the coal industry. Arch Coal’s quarterly sales has fallen in 13 of the last 14 quarters. It missed a $90 million loan payment last month, and has $4.5 billion in debt it can’t afford to pay.
Arch Coal’s stock has plunged 99% in the past two years. Its stock fell 31% yesterday, as you can see in this chart:
Arch is the fourth major coal miner to declare bankruptcy since the beginning of 2015. The others are Patriot Coal, Walter Energy, and Alpha Natural Resources. Yesterday, Reuters reported that companies responsible for 25% of U.S. coal production are currently in bankruptcy.
The news of Arch Coal’s bankruptcy slammed coal stocks yesterday. Peabody Energy Corporation (BTU), the largest U.S. coal company, fell 20%. Cloud Peak Energy (CLD), another large coal company, fell 11%.
• Cheap natural gas is a big problem for coal…
Natural gas prices have dropped 40% since early 2014, to a 14-year low. When gas is cheap, some power plants choose to burn natural gas instead of coal. Plus, burning natural gas is better for the environment than burning coal.
Yesterday, The Wall Street Journal reported:
Coal burned by power plants faces competition from cheap and relatively clean natural gas. Also, a slowdown in demand from China has pressured the prices of coal used in steelmaking. Major U.S. producers are scaling back, trying to shed mines, and laying off employees.
And new, strict regulations have cost coal companies billions of dollars. Bloomberg Business reports:
Arch said in the filing that environmental regulations have made it more expensive for companies to use coal. It blamed Environmental Protection Agency rules for causing more than 400 coal-fired generators to close. Overall, 23 percent of the generating units are expected to retire or convert by 2025, Arch said.
• Longtime readers know why we’re interested in coal…
Doug Casey often says any asset down more than 90% deserves a look. The price of coal is down 98% in the past eight years.
At Casey Research, our top goal is to help subscribers build lasting wealth. A key strategy we use is to buy valuable natural resource companies when they’re cheap. We want to buy great assets at attractive prices.
Natural resources, like coal, are “cyclical.” This means they go through huge booms and busts. By buying resources after a bust, when no one else wants them, we can get a dollar’s worth of assets for a dime or less. Today, we have that opportunity in coal.
Although politicians like to bash coal for being dirty, it still generates 40% of the world’s electricity. Even the Energy Information Administration, an arm of the U.S. government, admits that coal will generate 34% of U.S. energy in 2040.
The world needs coal to keep the lights on. Like all cyclical stocks, coal stocks will eventually bottom out and start rising again.
• E.B. Tucker, editor of The Casey Report, likes coal…
It’s highly unlikely the world stops using coal. For one, it’s too cheap not to use.
At roughly $30 a ton, thermal coal is cheaper than driveway gravel. That’s mind-blowing, given that coal is the most energy-dense fossil fuel on Earth.
But he isn’t buying coal stocks yet…
The decision by Arch Coal to file bankruptcy means we’re one step closer to the end of the bloodbath in the coal industry. But I’m still not personally invested in coal stocks.
Many of these companies can’t cover their expenses with thermal coal trading at $30 to $35 a ton. They have to pay pensions, employee health care plans, and other long-term obligations.
Shareholders are at the lowest rung on the corporate totem pole. It’s not where you want to be when an industry is in crisis.
E.B. says coal bonds are more attractive right now.
I personally own bonds of a coal royalty company. This company leases mining rights. It takes a cut on each ton of coal that leaves the mine. I’m confident the company will survive, so I’m buying its bonds for $0.60 on the dollar. I’m collecting 30% interest while the market turns around…
I think we will see a few more bankruptcies before the coal crisis is over. The industry will consolidate and the “survivors” should turn out to be great investments. That’s when I’ll start buying coal stocks again.
• Nick Giambruno, editor of Crisis Investing, has a different take…
As Crisis Investing subscribers know, Nick specializes in crisis markets. By buying in crisis markets, Nick’s subscribers often buy world-class assets at dirt-cheap prices.
For example, you may recall that Cyprus had a major banking crisis in 2013. During the crisis, Nick recommended buying shares in stable, profitable Cypriot businesses.
The crisis had crushed Cyprus’ stock prices. Many stocks were down 99%. But Nick’s analysis showed that some companies were still making good money. Investors had panicked and sold the great companies in Cyprus along with the shaky ones.
Less than two years later, Nick’s subscribers cashed in a 97% gain on a lighting-fixture company, and a 214% gain on a company that operates beachfront properties.
Like E.B., Nick sees big opportunity in coal today. But unlike E.B., Nick likes one coal stock at today’s prices…
• Nick’s favorite coal stock is Alliance Resource Partners (ARLP)…
Debt has turned out to be lethal for many coal companies. It’s one of the main reasons so many have gone bankrupt.
ARLP is an industry exception. Its balance sheet is a source of strength. With high liquidity and low debt, it’s financially far stronger than any other U.S. coal miner…
By retiring $205 million of long-term debt this year, ARLP reduced its debt-to-equity ratio to 84%, well below the industry average of 113%.
Interest coverage (operating income/interest expense) is a robust 15. That means ARLP is generating enough earnings to cover its interest cost 15 times over. In other words, debt is not a problem.
Alliance is an impressive dividend payer. The company has raised or maintained its dividend for 65 straight quarters. Today, it’s paying an incredible 20% dividend.
You can read more about this high-yielding coal stock by taking a risk-free trial to Crisis Investing. Click here for details.
Chart of the Day
Copper hit a seven-year low yesterday.
Today’s chart shows the price of copper over the past seven years. On Monday, it fell 2.1% to its lowest level since April 2009. Copper has fallen 29% over the past year.
Copper is a key industrial metal. It goes in everything from electrical wiring to batteries to plumbing parts. The modern economy can’t function without copper.
Like coal, the price of copper is cyclical. It goes through big booms and busts. Eventually, we’ll get a great opportunity to buy beaten-down copper stocks at bargain prices.
But for now, we recommend staying away. As you can see from the chart, copper is still in a freefall. Before buying copper companies, we want to see copper begin to carve out a bottom.
Delray Beach, Florida
January 12, 2016
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