U.S. Coking Coal Producers Bull Case - $BTU, $HCC, $AMR & Others

Research & Analysis Swing Trades
1

Hey guys I’ve been wanting to write this up for a while now, but I’ve been super busy between a cross-country move and the holidays.

Apologies for the barebones nature of this post, but I’m just going to lay out a basic thesis now while I have some downtime at work and then make updates and improvements later on when I have more time.

If you pay any attention to the global coal market you’ll know that coal prices hit an all time high and then plummeted last fall primarily because the Chinese government set a price ceiling and tanked the market. Classic China stuff. Accordingly, pretty much every coal producer’s stock fell off a cliff, but many are now on the rebound and have regained significant ground.

There have been some other interesting developments in the US and globally that I think will continue to drive demand for a specific type of coal called coking coal or metallurgical coal, which is used to produce coke which is in turn used in steel production.

The first major thing is obviously the US infrastructure plan creating a big demand for steel and the coal needed to produce it.

China also somewhat recently started a trade war with Australia and banned imports of coal from the country, which was historically its largest supplier. As such, China is turning to the US–among other countries–so that the country can continue to produce steel and also so its citizens don’t freeze to death.

In addition, Indonesia (the fifth largest coal producer in the world) also restricted coal exports due to fears of falling short of domestic energy needs. At first Indonesia totally restricted exports, but they have since walked that back and allowed some trade to resume.

I think that these factors make for a strong bull case for US producers, especially those that specialize in metallurgical coal.

The company I’m most interested in is Peabody Energy ($BTU). Their stock hit a high of nearly $20 last fall before falling down to about $9. Currently it’s on the rebound and trading in the $13-13.50 range. The daily chart has been forming a really nice rounded bottom and after $13.50 I don’t see big resistance until about $15.50 and not until around $20 after that.

I have also been watching Warrior Met Coal ($HCC) and have profited from calls on this already, but it is already near it’s high of last fall so I’m less sure of the upside here. I’m watching for a break out of the ascending wedge it’s in currently.

There are a few other tickers on my shortlist but some of them are just too pricey for my account. They may be of interest to others here, though. Those tickers are:

  • SXC - Suncoke Energy - This one is actually quite cheap
  • ARCH - Arch Resources
  • METC - Ramaco Resources
  • AMR - Alpha Metallurgical Resources

Here are links to articles for further reading if you are so inclined:
argusmedia.com
Reuters
NPR
S&P Global

That’s all I’ve got for now. Any and all feedback is deeply appreciated. If anyone gifted in the TA department could get out their crayons that’d be really helpful too!

Disclaimer: not financial advice from not a very smart localwoman

2 Likes
2

Update 1/21:

Indonesia has lifted its export bans for companies that have met a domestic market obligation.

Source

2 Likes
3

Coal tickers took a beating last week/today along with the rest of the market, so I’m looking for good entries again on HCC and BTU.

Coal prices are still increasing which should give tailwinds.

image
image750×520 17.5 KB

Indonesia’s export ban expires at the end of the month, but it has left a massive shortfall in the market that will take some time to recover and should keep prices elevated.

China allowed some Australian vessels to unload at its ports this week but there’s still a lot of uncertainty in China-Australia relations going forward. The vessels which were allowed into port had been waiting offshore since the ban was first implemented and there’s no telling yet if future shipments will be allowed in or not.

1 Like
4

Here’s a bearish article for BTU I pulled off of IBKR:

image
image975×885 91.4 KB

Thank you for starting this DD. I don’t know much about the coal sector but I find this trade interesting in that coal prices are soaring while coal producer stocks are languishing. In general, from the headline news that I skim over it seems a lot of financial institutions granted coal companies “grace periods” to clean up their environmental impact but have seen little in the way of progress. For that reason, there seems to be some saber-rattling going on with these financial backers with threats to withdraw funding should coal companies not act quickly. Would like to dig in more to BTU since they’re a domestic company and where there market is at. Look forward to more updates!

5

Indonesia has lifted its export ban as of Feb 1st, but companies still need to meet their domestic market obligation and pay fines before they can resume shipping.

HCC and BTU have both done really well regaining ground this past week after the market-wide correction at the end of January. Both companies had positive news–analysts upgraded their price targets to $25 for BTU and $36 for HCC. I’ve been in and out of BTU twice for 50% gains since my callout last week.

BTU has earnings on 2/10 and HCC will follow later in the month. I will likely be holding shares through earnings on BTU and playing options before/after. I will probably get a call on HCC for BTUs earnings since the two move in sync and I suspect there will be a reaction.

1 Like
6

BTU crushed their earnings, eliminated a ton of debt, and gave really solid guidance.

Peabody - Company News (peabodyenergy.com)

ST. LOUIS, Feb. 10, 2022 /PRNewswire/ – Peabody (NYSE: BTU) today announced its fourth quarter 2021 operating results, including revenues of $1,264.6 million; net income attributable to common stockholders of $513.0 million; diluted earnings per share from continuing operations of $3.90; and Adjusted EBITDA1 of $444.4 million.

During the quarter, the company generated Free Cash Flow of $426.6 million and retired an additional $200 million of senior secured debt, resulting in approximately $420 million of debt retirements year to date, more than 26% of debt outstanding at the start of the year.

“Our robust fourth quarter results further demonstrate the capability of our diverse mine portfolio which continues to[color=#fcba03] benefit from strong market fundamentals driven by the vital necessity for coal to produce reliable energy and steel to fuel the global economy,”[/color] said Peabody President and Chief Executive Officer Jim Grech. “We continue to experience strong market dynamics, and as a result we have significant forward sales commitments and are adding incremental production capacity to meet market demand for our products, while remaining focused on cost competitiveness.”

1 Like
7

Update week of 2/21:

BTU had an amazing performance in the early week but then had a huge selloff following news of a Senior Note Offering which, as I understand it (someone more knowledgeable can provide better insight here) functions or is perceived similarly to a share dilution.

I had exited all of my options positions around $19 but I’m still holding some shares which I will be averaging down on once BTU seems to have found a bottom. I’m still bullish on the company for the rest of the year and I’m looking at this week as a correction that was probably overdue given this stock has had several 10-20% banger days in recent weeks.

HCC had earnings on Tuesday after hours and beat EPS and revenue by pretty big margins. Guidance was also positive. Unfortunately there just wasn’t much of a reaction to the news. The stock fell a bit with Russia/Ukraine news like the rest of the market. This stock may just be too illiquid to really run like BTU does, but I’m still bullish. I have shares that I’ll probably average down on and some March $35 calls that are pretty red right now that I’ll be looking to exit soon.

2 Likes
8

BTU seems to flying under the radar of this community, but it just keeps chugging along. It’s up 65% this week.

2 Likes
9

Additionally, AMR and ARCH are up 20% last week. AMR has earnings today at 10:00am. Given how well ARCH has done since it’s earnings on the 15th I am going to grab shares for AMR premarket and see if I can scalp an OTM call at market open

2 Likes
10

Looks like BTU announced a solar energy partnership to develop solar sites in some old mining sites of theirs on March 1. This could be driving some of the increase as well.

11

Wanted to toss in the Pre-Earnings release for AMR.https://s22.q4cdn.com/670299758/files/doc_financials/2021/q4/Press-Release-Alpha-Announces-4Q21-Results-3.7.22.pdf

12

So here is what happened with BTU. BTU owns short positions on futures contracts for coal as a hedge against their long positions in spot. These contracts are for an average price of $84 for a specific type of coal called seaborne thermal coal. When the price ran so hard on futures they got a $534 MM margin call they couldn’t meet, so they opened a credit facility with Goldman Sachs.

This has caused investor consternation as it signals liquidity problems and possibly limits Peabody’s upside as the price of this type of coal is much higher than their contracts are for (meaning they sell it for much less than it’s current value). These derivative contracts run through 2023. The terms of the deal with GS are also a bit onerous as it’s senior debt at 10% interest and requires any equity sales to be used to repay if any sales occur under the at-the-market issuance (not entirely sure how to interpret this part).

The good news is the credit facility is a multiple draw facility which means they don’t expect to take all of it right away, and the contracts they hold at $84 is a relatively small amount of the total amount of this coal of this type they produce. Short term this is bearish, but long term it’s not that bed yet.

1 Like
13

Interesting quick article about where global coal demand/pricing could be headed in 2022:

Monsters of Rock: China could expand coal production by 500 MILLION TONNES in 2022, Macquarie says - Stockhead

tl;dr (but also my own biased analysis) China is on pace to produce a fuck load of coal this year, which on the surface seems bearish for coal prices. However, Russian coal is still off the table, and spot prices have recently been hitting scarcity levels which could actually drive down demand (and price) because buyers will simply refuse or be unable to pay any price for coal. So, with China pumping more coal into the market, it could actually stave off scarcity and “demand destruction” which I think is actually bullish.

14

Yet another bullish article for U.S. Coal
https://www.bloomberg.com/news/articles/2022-04-04/u-s-coal-prices-top-100-a-ton-for-first-time-since-2008

15

I’m interested in these plays given that coal is first up to be cut from EU purchases from Russia. I know @sparrow has been following AMR pretty closely. Will have to take a look at the various options.

2 Likes
16

AMR seasonality (just cause I was looking at seasonality plays going into summer)

17

Awesome! BTU has been consistently profitable for me since January. I actually don’t think I’ve lost a single trade on it yet and I have only about a year of trading experience. It’s volatile but also fairly predictable, and also a fundamentally sound company—kind of a sweet trio.

18

I have picked up some BTU calls today. There is something that im not sure about is the price cited from that article cited by localwoman when I compare its pricing in tradingeconomics.com One thing I will say is that even with the underlying commodity up , the price of BTU went down with SPY so I took this as opportunity as a buy. Also I need to check when the prices of coal get updated as i do not see its intraday price action movement like oil/gas.

1 Like
19

EU approved the ban on Russian coal today, but it won’t go into full effect until August.

https://www.bloomberg.com/news/articles/2022-04-07/eu-backs-ban-russian-coal-in-first-punch-at-energy-revenues

20

@sparrow would like everyone to know that AMR had great earnings and announced a buyback but is down on the day. Something to watch.

2 Likes