In May, I told readers that U.S. coal was finding a home in Europe.
U.S. coal exports this year are expected to exceed 100 million tons (mt) for the third consecutive year – a record run.
Nearly half that amount – about 47 mt – was imported into Europe in 2013. And that represented a drastic rise from 13.6 mt in 2003.
The UK alone increased its U.S. coal imports 10-fold during that timeframe. Even Germany saw its imports of U.S. coal rise – from under one mt to more than 15 mt during that decade.
U.S. thermal coal is just too cheap to resist for many European utilities.
U.S. “Dirty” Coal Industry Renaissance
The biggest gainer from these exports to Europe is so-called “dirty” coal.
This is coal from the Illinois Basin (Indiana, Illinois, Kentucky and Missouri) with high sulfur content, and accounts for about a third of all U.S. coal exports.
Thanks to coal scrubbing technology, this type of coal has become a cheap and viable alternative to other energy sources.
This is increasing the appetite for coal from the Basin. Overall coal output in the Illinois Basin is expected to surpass that of Central Appalachia by the end of the decade.
Yield from the region is expected to hit 185 mt in 2020 – from only 102 mt in 2013. Of course, that’s not really surprising, since mining the coal in much of the Basin is one-third less costly than in Appalachia.
But the real focus should be on smaller coal companies in the Illinois Basin. Here are two that have caught my eye…
Two Illinois Basin Coal Investments
Alliance Resource Partners LP (NASDAQ:ARLP) is the largest coal producer in the Illinois Basin. It’s a limited partnership with a healthy 5.4% yield.
But its performance numbers tell the real story.
Producing 38.8 mt in 2013, Alliance became the third-biggest eastern coal operator. It has coal reserves in excess of 1.1 billion tons. And it carries very little debt.
Alliance has managed to sell its coal often at above-spot market prices.
How? Well, it tends to enter longer-term contracts with utilities. And it uses an exclusive customer database to optimize its production to match clients’ needs.
Bottom line: Its management has delivered – returning a total of 440% since 2008 to unit holders.
Then there’s Foresight Energy LP (FELP), the third-largest producer in the Illinois Basin.
The company recently IPO’d for $350 million. It operates four mines in the region, and its production costs are about $10 less per ton compared to other producers in the area. And like Alliance, much of its output is sold through long-term contracts to utilities.
The company estimates that coal production in the year through June 2015 will reach 24.1 mt – up 34% from 2013.
It’s one of the biggest exporters of U.S. coal, exporting about 37% of its output.
These two companies show that coal is not dead as an investment. Investors just need to be selective.
And “the chase” continues,
Tim Maverick